There are many factors that influence and regulate mortgage rates, a basic knowledge about these deciding and highly volatile factors are vital to getting a good deal when shopping for mortgage loans. Many borrowers are inclined to think that lenders are solely responsible for the rising and falling rates, but in effect, it is investors in the secondary market that is responsible for pegging at whatever rates obtains. This factors, since it is not decided by a single front can only be predicted or forecasted.
In an attempt to break the whole process down, after you have met the pre-requisite conditions, a lender – a bank or any type of financial institution, provides you – the borrower, with money to buy your property. This money is then transferred to the account of the seller of the property. When the deal is done, the lender, by law has two options:
• Keep the loan in its portfolio
• Sale it on the secondary market
By keeping the loan, the lender is rewarded, over time, by the interest that you, the borrower pay on a regular basis until the maturity of it. Selling the loan circulates, sustains and provides immediate funds that are henceforth used to create financing options for other property investors.
So, in essence it is the activities of secondary market investors that are responsible for the mortgage rates that obtain today. Secondary market investors include:
• Insurance companies
• Pension fund providers
• Securities dealers, etc
Government chattered bodies such as Freddie Mac, Fannie Mae, are also strong investors. By buying and retailing (mortgage buy backs), they facilitate and have substantive control of high-liquid mortgage investments.
The activities of these investors affect the rates in the sense that in attempt to earn the highest possible returns on their investments, they rely on the current and forecasted condition of the economic conditions. If the conditions are favourable, they expect the future returns to be higher than current ones and do not buy mortgages until this holds. Lenders expect to make reasonable profit too and this excites the mortgage rates. Lenders cannot sell off their loans for less than expected returns. When the conditions are not so favourable, investors buy whatever to avoid lower profits and this lowers the rates.