Factors Which Determine Interest RatesPosted by on Thursday, August 18th, 2011 at 12:00pm.
The world of mortgage is indeed complicated. And the sudden rise and the fall in the rate of interest in mortgage loans have added more complexity to it. In fact it is because of extremely complicated series of relationships between several factors which determine the mortgage rate. The Fed, the market, the inter bank rate of interest and of course, people’s willingness to spend money, determine the rate of interest on a mortgage loan.
Before delving into what determines mortgage rates, you need to understand the market itself. It is to be kept in mind that from the point of view of both the lenders and the home buyers, mortgages are nothing but investments. If you are a home buyer, you view mortgages as investments. Again, from a lender’s point of view also, mortgages are investments. Suppose a lender provides a mortgage loan of $100000 at an annual simple rate of interest of 5% to a home buyer. Here the lender will receive an annual payment of $5000.
Now, as long as there in only one lender in the market place, he/she can charge prettily high rate of interest. However, if there are many lenders in the market, offering mortgage loans, the rate of interest associated with mortgage loans will come down because of increased competition. If the rate of interest on mortgage loans goes to very low levels, buyers will look for other form of investments where chances are more to obtain higher rate of interest.
Again, suppose a lender has certain amount of money with him/her. Now as the number of home consumers who want to borrow the money rises, the lender can charge comparatively higher rate of interest. In other words, more home consumers imply higher rate of interest. Apart from these, these are many other factors which influence the mortgage rates which include the expected yield by the investors, number of investors in the market, number of dwelling buyers in the market and many other things.
Apart from these, of course, there are banks, lending institutions and the FED which are responsible for influencing the rate of interest on mortgage loans. It is not the case that banks and the lending institutions sit together and do all the mathematical works themselves to calculate the interest rates on mortgage loans. Many a times, it has been seen that mortgage rates are pegged to some other rates. One such index is the interest rate associated with US Treasury bonds. Some times, the mortgage rates are kept slightly higher than the rate of interest on mortgage loans. Since the US Treasury bonds are secured whereas there are chances of default in case of mortgage loans, generally the rate of interest associated with mortgage loans are higher than the rate of interest on US Treasury bonds.