How mortgage interest rates are determined

Good afternoon! I hope you’re well. I wanted to touch on how mortgage interest rates are determined.

The layperson in you may not know or may think that interest rates are tied to the Federal Reserve Board and its rates.

The Federal Reserve sets short-term rates which impact lines of credit, credit cards and adjustable rate mortgages.

Mortgage interest rates that are fixed for a longer period of time (say a 15 or 30 year fixed rate) are actually determined by the yield on the 10 year treasury note plus a margin. With the recent volatility in the stock market there has been a flight to the safety of treasuries. That is why the 10 year yield has allowed for mortgage interest rates as low as 4% O.A.C. on a 30 year fixed mortgage.

Where do I see the market headed as we go forward? Although there will be big swings with rates as there were today, I expect mortgage interest rates to stay low through the end of the year now. The unsettling global news will cause investors to seek safer harbors such as treasuries.

The bottom line is a lot of people are interested in refinancing right now, either to a lower rate, a shorter term or both. If I can be of help anwering any of your questions about this, please contact me. Thanks again for reading. Have a great day!


About paulmcfadden

I am a mortgage loan officer with the Legacy Group in Bellevue, WA. I have been in the business for almost five years now and feel very fortunate to work for such a great company that is employee-owned. In my spare time, I love the outdoors and working out, like to read all kinds of things, love spending time with my first grandson Sam, and all things food and wine!
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2 Responses to How mortgage interest rates are determined

  1. Paul, I always wondered how this system works.

    I just heard on NPR, that the interest rate is as low as 4.5%, but only people who have lots of equity in their homes are eligible. In other words, the new home buyers are not. Did I understand this correctly?

    Great Post.

  2. paulmcfadden says:

    Shirin: That’s partially right. Generally people want to have 20% equity at least or mortgage insurance will be required. Loans are available to people with less equity though. NPR is slightly behind on rates although they do change every day; sometimes more than once. Thanks!

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