There’s much you should know about mortgage and how rates are determined. Mortgage rates are “made” based on bonds traded in the mortgage-backed securities (MBS) market. Similar to corporate bonds, mortgage-backed bonds trade all day, every day. Here is why.
MBS Pricing Changes Constantly
In general, as the price of a mortgage-backed bond changes, so do mortgage rates. This is true for conventional mortgages backed by Fannie Mae and Freddie Mac mortgage bonds; and for FHA loans, VA loans and USDA loans, which are backed by Ginnie Mae mortgage bonds. The price of a mortgage bond is based on supply and demand. All things equal, when Wall Street’s demand for mortgage bonds increases, mortgage bond prices rise which causes mortgage rates to fall.
Mortgage Rates and MBS Prices Move in Opposite Directions
Demand for mortgage bonds can change for a multitude of reasons, but the most common driver of demand is risk-avoidance. Most mortgage-backed bonds are guaranteed by the U.S. government, therefore, they’re considered “extra safe”.
Default risk is Practically Nil with U.S. government-backed Debt
During periods of economic or political uncertainty, then, U.S. mortgage bonds tend to be in high demand. Its trading pattern is known as a “flight-to-quality” and it’s a fairly common one. When there’s a bona fide flight-to-quality going on, consumer mortgage interest tend to drop.
How To Be a Good Mortgage Rate Shopper
Mortgage rates move randomly, and change with little or no advance warning. When you’re shopping for a mortgage, then, it’s important to know the tricks — and also to have a plan. You have to shop “right way.” This means remembering that shopping for a mortgage rate is really about shopping for a mortgage rate and its associated closing costs. You can’t get one without the other. A mortgage lender will never quote you a rate without telling you the fees that go with it so pay attention when you get your quotes — a rock-bottom rate means nothing if your closing costs are astronomical. There are two ways to shop for mortgage rates, then.
- You can shop for a particular mortgage rate that you want
- You can shop for a particular closing cost that you want
RE/MAX Realty Professionals—The Results Team—is ready to help you buy or sell your home! Visit www.calltheresultsteam.com. Or call Lesa Miller at 812-360-3863 and Jenivee Schoenheit at 317-258-0995.