A mortgage rate is the rate of interest paid on the mortgage loan and it is expressed as a percentage. You might be wondering how do they put rates on the mortgage.
For the layman’s eyes, mortgage is rising up and down without explanation. But just like the natural phenomena that happens in ocean tides that is pulled by the moon’s gravity, mortgage rates have their own driving force.
Originator is called to the mortgage lender who funds your loan. A loan originator can be a bank, a credit union, or a financial institution. On the day of the funding, the money comes from the loan originator’s hands down to yours. Then you turn over that money to the seller of the house.
The originator has the option whether to keep that loan in its portfolio or selling it in the secondary market once the loan is funded. The secondary market investors keep the money circulating so that the originators won’t run out of money for the new mortgages. If the loan originator keeps the loan, it makes money from the interest you pay every month. If the loan is sold, the originator refills its funds again and can make more loans to the homebuyers.
How does the secondary market affect you? Investors would want to earn the best return as possible. The level of return is determined by the current and expected condition of the economy. If the economy is improving, future yields are expected to be much better than the current yields. Therefore, these investors will have to wait buying until much higher yields happen. This way, the mortgage interest goes up because lenders cannot sell their loans at lower yields. On the other hand, if the economy is low, the investors would buy what’s available to avoid being stuck with lower yields. Because of this, the mortgage rates would go down low as investors are demanding to buy before the yields go low.
As a buyer, it is best to stay on top of financial trends and plan ahead of time. Weigh and choose the best mortgage rate as possible. Whenever the tide is low, call your lender and lock in that rate. You will realize that you are enjoying the waves of prosperity if you do.
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