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As a home buyer, you are probably already are aware of what determines your mortgage interest rates. Mortgage interest rates are determined mostly on the secondary market, where mortgages are bought and sold. But besides that, mortgage interest rates are also set by market forces, including government monetary policy, which are beyond your mortgage lender’s control.

A Brief Overview of the Mortgage Market

To understand how mortgage interest rates are determined, you must first understand the mortgage market. Financial institutions like Fannie Mae and Freddie Mac buy mortgages and bundle them into securities that are similar to bonds. They then sell the mortgage-backed securities to investors who are interested in making money off of them. Fannie and Freddie exist to keep money moving through the mortgage finance system. When you obtain a mortgage, the lender sells the loan on the secondary market so they get their money back quickly and they are able to lend the money again to other borrowers.

Mortgage Interest Rates & Domestic Issues

With that in mind, it’s time to move on to inflation. Inflation is one of the largest domestic issues U.S. consumers face. Mortgage interest rates tend to fall when:

  • Stock values decrease
  • Foreign markets tumble
  • Unemployment rises
  • Inflation is expected to slow down

Just the same, mortgage interest rates tend to rise when these factors increase or speed up. To mortgage borrowers, inflation means interest rates are rising, increasing the cost of obtaining a mortgage. When the economy is on an upswing, investors demand higher yields on mortgage bonds, forcing lenders to raise mortgage rates. In a market downturn, interest rates tend to drop for consumers, which means they have more money to spend.

Global Events & Investor Confidence

Finally, investor confidence is one of the factors that affect mortgage interest rates. Global events like natural disasters or political and economic instability can cause investor confidence to plummet. Higher risk investments tend to have higher interest rates. So when there is an increased demand for safe, non-risky investments interest rates tend to get pushed down. These safe investments benefit new borrowers and current homeowners who want to refinance their existing home loans.

Up Next: How Falling Mortgage Rates Affect the Housing Market

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