Orion’s brokers know that mortgage rates are at 20-year highs. But it is important to know that they won’t stay at these exact levels, possibly going up or coming down. In other words, mortgage rates are constantly in flux. Our brokers are often asked by their clients, “How are mortgage rates determined?”

Experienced brokers know that a borrower’s rate is dependent upon numerous factors, both personal and market related. All of your clients have heard of the stock market, and most have heard of the bond market. The bond “market,” an electronic system of buying and selling fixed-income securities, has the most impacton mortgage rates. Bonds backed by mortgages are the particular mechanism for trading home loans among investors. These mortgage-backed securities (MBS) are collections of home loans that share similar characteristics, and processed and underwritten in the same way, often based on Freddie Mac’s and Fannie Mae’s standards. Some pools of loans are composed of borrowers with similar credit scores, down payment percentages, or even loan amount.

That’s on the supply side provided by our brokers. On the demand side, investors that choose to buy certain bonds decide what to purchase based on their desire for a certain rate of return and risk tolerance. Mortgage bonds offer a set, sometimes guaranteed, yield. When institutions and people are buying more mortgage bonds, it drives the prices higher and mortgage rates decrease.

The U.S. Federal Reserve does not set mortgage rates, but the same factors that drive the Fed to make decisions drive interest rates in general. For the last several years the Federal Reserve’s primary tool for stabilizing the inflation rate hasbeen the federal funds rate, the rate at which banks borrow money from each other overnight. If short-term interest rates are low, as they were in 2020 and 2021, money is cheaper to borrow. That increases the overall money supply in the market, pushing prices (and thus inflation) up. If, on the other hand, interest rates are higher, less money is available, and prices decrease, and in theory inflation should fall.

When the Federal Reserve keeps short-term interest rates low, as it did in 2020 and 2021, mortgage interest rates tend to be lower. When times are prosperous and our economy is doing well, mortgage rates increase. When investors think a downturn is on the horizon, and the economy may slow, money is moved back into bonds, pushing their prices higher and rates lower.

Besides market factors, your clients should know that there are many personal factors that impact their mortgage rate such as credit score, down payment amount, occupancy, the maturity of the loan (30-year or 15-year), and debt to income ratio.

A borrower’s credit history and score are the biggest indicators of risk to mortgage lenders. No one wants to make a loan to someone who isn’t going to make their payments, and the credit score helps show lenders how likely payments will be made on time.

The more money a borrower puts towards the down payment, the more “skin in the game” a borrower has, and from the lender’s perspective a higher down payment brings down your risk level. On conventional loans (Freddie Mac and Fannie Mae programs), if your client’s down payment is less than 20 percent, they will be required to pay mortgage insurance.

Historically speaking, borrowers who occupy their own home, rather than borrowing money to finance a rental property, are more reliable in making their payments. One ofthe factors determining a mortgage rate is occupancy: is it a primary home, a vacation home, or an investment property? Borrowers receive the lowest mortgage rate on their primary property. Because they are viewed as greater risks, secondary homes or investment properties will have slightly higher mortgage rates.

One final personal issue brokers should inform their clients of. If they convert home equity into cash, they will receive a higher rate than if they were purchasing a property or refinancing to lower their interest rate or change their term. Lenders and investors in mortgage-backed securities perceive more risk with the higher balance than your client had going into the transaction.

An advantage of borrowers using a broker to help them with their mortgage is to answer questions about rates and points and programs. We’re here to help you help them!