Ordinary people assume that the fluctuation
of mortgage rates is normal. Sadly, a lot of us do not fully
understand the forces that affect fluctuation. Most people assume
that mortgage lenders are the ones solely dictating mortgage rates.
But this is not true: there are actually a handful of reasons why
mortgage rates change.
As a consumer we must understand what factors affect
mortgage rates. It is important to have at least a basic
understanding of mortgage rates. To explain the concept behind
mortgage rates, we must first know the people involved in
mortgages.
Basically, mortgage lenders who lend funds in the
form of loans are known as loan originators. These include banks,
lending institutions, credit union, and other financial
groups.
The moment the loan is granted and released, the
funds from the loan originators are forwarded to you in the form of
cash. You as a borrower will then turn over the money to the seller
of your home or property. Meanwhile, the loan originator has all the
rights and option to keep the loan in its own portfolio or to sell
it to a secondary market investor. In the case that the loan
originator keeps the loans, he earns money from monthly interests
collected from borrowers. Meanwhile, if the loan is sold to a
secondary market, the loan originator simply recovers its funds so
it can offer more loans to interested clients. Secondary market
inventors ensure the continuous flow of funds in order for
originators will have sufficient money for new mortgages.
But who are these secondary market investors and how
do they affect the prevailing rates? In the mortgage industry, the
most popular secondary market investors include pension funds,
insurance companies, securities dealers, and government-chartered
companies.
Secondary market investors have substantial
influence. These investors do not just invest for nothing. They
invest a lot of money because they want to increase their earnings
or Return of Investment (ROI). The range of the return is dependent
on the present and future (predicted) condition of the economy. When
the economy is up, the future is expected to have positive results
compared to the current economy. As a result, investors will stop
buying until such time when a higher rate is expected. This will
lead to the increase of mortgage interest rates because lenders will
not sell their loans at lower rates.
On the contrary, when the economy is down, inventors
would end up buying whatever is available to avoid being caught with
lower rates. This leads to the decrease of mortgage interest rates
since investors are very eager to purchase before rates starts to
get very low.
Now that you have a better understanding on the
basics of mortgages and what factors affects the rates, you now have
a sound basis of your decision-making. All you have to do is create
a plan and keep yourself informed of the financial trends. This way,
you can have a forecast of when to lock those rates when conditions
are favorable for you.
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