When you go to borrow money for a home loan, your lender will offer you an interest rate. While the mortgage rate you end up with can be influenced by what you do in your financial life, it is also true that mortgage rates are determined on a national level as well. Average rates across the nation are actually influenced greatly by the secondary mortgage market.
Determining National Mortgage Rates
When your lender approves you for a mortgage loan, that loan is usually sold to someone else. These loans might be bought by Fannie Mae or Freddie Mac, or by other mortgage servicers and investors. Fannie Mae and Freddie Mac together account for a large amount of the mortgage loans out there, since they are among the largest and most influential mortgage investors around. Their entire purpose, as GSEs (government sponsored enterprises), is to help keep the mortgage market moving efficiently. One way they do that is by purchasing home loans from lenders.
Mortgage investors either keep the loans in their own portfolios, or the loans are bundled together into securities that can be traded on the market in a manner similar to (but not exactly like) bonds and Treasury securities. Some of these mortgage-backed securities are included in mutual funds and hedge funds. Collectively, the financial investors that have an interest in making money in the secondary market are the ones who actually influence the mortgage rate on your home loan.
Just as returns in the stock market fluctuate, the returns from the secondary market move up and down. When investors want higher yields (such as when the economy is in good shape), mortgage rates move higher. When demand for these assets is down (such as when the market is in a downcycle), the yields drop.
Also affecting mortgage rates is consumer demand. When the economy is down, and consumer demand for loans is low, mortgage rates are lower in order to attract more borrowers.
It is worth noting that 10-year Treasury notes are often considered indicators of where interest rates on mortgages are headed. Generally, when bond prices go up, yields (and mortgage rates) go down. If Treasury yields are increasing, the inverse relationship between Treasury bond prices and yields mean that bond prices are decreasing – and that home loan rates are likely to begin moving higher.
Many lenders look at the national average mortgage rate, and use that as the best rate for home loans. If you have good credit, you can get the best rate ― if you have less than good credit, the lender may adjust the rate higher to reflect the greater risk.