Although Orion and our brokers are active in the purchase business year ‘round, summer is the traditional home buying season. And occasionally our AEs are asked, “How is my client’s mortgage rate set?” The basic answer is that their mortgage interest rate is the price they are charged for their home loan. Rates go up and down every day, and they’re currently lower than they’ve been in a year. The rate significantly impacts your client’s monthly housing bill, so we think it is important for our brokers to understand how they’re set.

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Several external factors influence mortgage rates. Borrowers can’t control these factors but understanding them can help you help your clients grasp why rates are trending a certain way and know how they could change in the future. Events around the world, for example, can impact inflation rates, geopolitical uncertainty, and the psychology of home buyers.

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The primary factor is the overall state of the United States economy. If the economy is doing well, with the consumer in a healthy state, the job market strong, and housing prices improving, rates tend to go higher. Conversely, if things are slow, as they were during the pandemic, rates drop.

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Brokers know that it is easy to watch our Federal Reserve and how it reacts to the economic climate. The Federal Reserve acts via its Federal Open Market Committee. This won’t meet for over a month (September 17& 18) but… When the federal funds rate (what banks charge each other for overnight loans) goes up, mortgage interest rates generally follow. This is also true for the Secured Overnight Financing Rate and the Constant Maturity Treasury rate as well, two indices to which adjustable-rate mortgages are tied.

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The demand for mortgage-backed securities by investors impacts mortgage rates. A mortgage-backed security is an investment vehicle that pays investors a portion of the principal and interest payments made by the mortgage holders in a collection of home loans. A government or private entity purchases home loans from mortgage originators. Then, that entity issues securities, or the rights to the principal and interest payments, to investors. Most mortgage-backed securities are issued by Fannie Mae and Freddie Mac, which are two U.S. government-sponsored enterprises (GSEs). When demand for MBS rises, their yields decrease, which in turn lowers mortgage rates. Conversely, a decrease in MBS demand causes yields to increase, leading to higher mortgage rates.

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The U.S. Government’s rules and programs impact mortgage rates. Programs that make it easier for people to buy homes, like tax breaks or affordable housing loan programs, can make it easier to buy homes. But when more people want mortgages, that might raise rates. In other words, government plans and laws might help keep rates low if they provide money for home loans, but they can increase mortgage rates if they encourage more people to buy houses and drive up demand.

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All of these external factors influence the general interest rate climate. But brokers should remind their clients that their specific loan details, financial standing, and new property information further refine their mortgage rate. This is where a skilled and experienced broker will help.

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A borrower may choose a 30-year, 15-year, or adjustable-rate mortgage. A shorter-term mortgage has a lower interest rate, but higher monthly payment. The type of mortgage also impacts the mortgage rate: An FHA loan generally has a lower interest rate than a conventional mortgage, but it often comes with higher mortgage insurance costs that are difficult to cancel. The loan amount, size of down payment, closing costs, credit score, location, and type of property all factor into the calculations.

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As you can tell, mortgage rates are complex, much different than, say, running a race in the Olympics and having the fastest time. This is why it is best to have a conversation with an experienced broker!

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