Getting a handle on mortgage rates

Mortgage rates

are influenced at several levels–from worldwide economic events,
which you have no control over, to your credit rating, which you
can control.

Here are the factors–from large to small–that determine your
refinance mortgage rate.

The economy

Interest rates, including mortgage rates, move with the
economy.

“When the economy is weak, and inflation is low or falling,
people tend to move into conservative investments like bonds,” says
Keith Gumbinger, vice president of HSH.com. “This demand drives
bond prices higher and yields lower, and serves to influence
mortgage rates downward. The lowest mortgage rates often come amid
the bleakest economic conditions.”

What moves mortgage rates?

When the European economy was threatened by instability in
Greece and other countries, investors worldwide turned to American
bonds as safe investments; that helped lower U.S. interest
rates.

Mark Greenberg of Wealth & Tax Planners in Walnut Creek,
Calif., says, “Long term rates are set by the ‘market’ (traders,
banks, etc., i.e. the participants’ collective wisdom about where
rates should be). Mortgage rates, he explains, tend to follow the
rates on 1, 5 and 10-year Treasury notes.

“As demand pushes bond prices up, they cost more, so they yield
less (investors pay more for the same dividend amount). The
converse is also true.”

The Fed

Reading the financial news, it’s easy to think that if your
mortgage rate went up, it’s because the Fed “raised” interest
rates. That’s simply not the way it works.

Savings institutions are required to maintain a certain level of
deposits, called reserves, with the Federal Reserve Bank, to make
sure that there is money to pay depositors when they want it. The
Fed supervises overnight loans of these reserves from one bank to
another to cover fluctuating needs for cash.

Why the Fed has little control over mortgage
rates

So when the Federal Reserve “changes” the rate on these loans
(called the Federal Funds rate), it simply uses its control over
the supply of money to influence rates. It can’t dictate what banks
charge, and the Fed’s influence over short-term rates does not
extend to mortgage rates.

“Unlike the direct purchases of MBS last year (QE1), the Fed’s
purchases of Treasury debt (QE2) wasn’t specifically aimed at
adding liquidity to mortgage markets in hopes of lowering mortgage
rates directly,” says Gumbinger. “Rather, it was expected that
there would be some beneficial market-related effect as investors
sought out higher-yielding, but riskier assets, including mortgage
backed-securities. While the Fed’s program may have helped some
other interest rates to decline or stocks to rise, there was not
much overall effect on mortgage rates.”

Lender pricing policy

The Fed doesn’t get to set mortgage rates; individual lenders do
that. The rates they set depend on several factors:

• The pipeline: Mortgage lenders constantly evaluate the amount
  of business coming in and adjust their rates accordingly. When
  they have more business than they can comfortably process, they
  raise rates to stem the flow. When they want to beef up their
  business, they lower rates to bring in more loans. That’s one
  reason rates differ from lender to lender.
• Lender efficiency: Like all businesses, some lenders are
  better at originating mortgages than others and can operate on
  smaller margins. That translates to lower rates for their
  customers.
• Lender perception of risk: Some lenders charge more to do
  loans they consider less desirable. For example, jumbo loans,
  loans on certain types of properties or in certain parts of the
  country. Others evaluate risk differently.

This is one factor you do have control over–you can’t set
lender prices, but you can compare current mortgage rates between
lenders and go with the one that offers the best refinance rate to
you.

Your profile

Finally, you determine the refinance rate you are offered. The
strength of your refinance application influences the mortgage rate
lenders are willing to offer you. Your credit rating and home
equity have significant impact on what you pay.

For example, on a conventional Fannie Mae mortgage, a borrower
with a 640
credit score

needing a 90 percent refinance mortgage pays customary fees plus an
extra 2.25 percent in risk-based pricing adjustments. Refinancing
with less than 20 percent home equity also means the addition of
mortgage insurance premiums, which increase your annual percentage
rate (APR). Upping your credit score by as little as 1 to 20 points
can save you thousands.

Your choices

Your choice of loan also influences your mortgage rate. It would
take a lot of movement in the economy to see 30-year fixed mortgage
rates come down a full percentage point
.

But by choosing a 15-year fixed loan or a hybrid ARM fixed for
3, 5, 7, or 10 years, you could drop your rate by 0.5 percent to
over 1 percent. And you can minimize what you pay by shopping and
comparing quotes from several lenders. Mortgage quotes between
lenders vary anywhere from 0.375 percent to 0.625 percent. That’s
money you don’t need to leave on the table.