There are many factors that contribute to changes in mortgage rates.But first we need to understand what happens to mortgages after the sale is completed.
After a bank lends money to a borrower for the purchase of a home, the bank then sells the mortgage to an investor. After buying up many mortgages, the investor will sell shares of the collection to other investors, similar to buying stock in a company. These investments are called Mortgage Backed Securities.
There is another type of investment called a Treasury Bond. 10 year Treasury Bonds and Mortgage Backed Securities appeal to the same types of investors. They are both held for approximately the same amount of time, and while Treasury Bonds are guaranteed and are considered the safest investment, Mortgage Backed Securities are also considered relatively safe. Since Mortgage Backed Securities compete with Treasury Bonds for investors, mortgage rates adjust as Treasury Bonds do.
There are other economic factors at play as well. The better the economy is doing, the less likely people will lose their jobs and more likely people will pay their mortgages. This causes mortgage rates to increase as investors will view them as safer than if the economy is doing poorly.
It’s important to remember also that individual borrowers will have different rates depending on credit and other factors. The mortgage rate that banks advertise is often the lowest rate they will give to someone they view as being in the lowest risk category. The lower your credit score, the higher your rate will be to account for the additional risk. Ultimately it comes down to an individual’s opinion of the risk you pose which can be swayed by factors other than credit. For example, if you have significant assets such as a large amount of money in a savings account, stock, or another house that is paid off, the bank employee may view you as lower risk despite your poor credit.