It’s probably not what you think . . .
The Federal Reserve does not set mortgage rates, although some of their actions could influence rates . . .
Banks don’t set mortgage rates . . .
Mortgage rates are determined by a basic economic principle called supply and demand . . .
What is the demand vs. the supply of mortgage-backed securities in the marketplace?
See more here . . .
Mortgage-backed securities are what allows mortgage financing to be available to the bulk of the population rather than restricted to a privileged few people.
If it weren’t for mortgage-backed securities, for example, mortgages with less than 20% down payment may not be available.
Mortgage-backed securities allow lenders to sell the loan on the open market, making them free to loan that money again to the next borrower.
If they couldn’t sell the loan on the open market, they would have to keep the loan in house and would not be free to loan that money again.
This would have a serious effect of drying up much of the money available for lending.
So, what happens is that a whole group of mortgage loans are bundled together into one security, a mortgage-backed security, and is sold in the marketplace much like a stock would be.
Therefore, it is this up or down fluctuation in the security pricing that changes the interest rate.
When the Federal Reserve changes their rate, that change may have a ripple effect through the economy and thereby affect mortgage rates, but it can’t have a direct effect.
See more on that here.
In the last few years, the Federal Reserve has also been holding mortgage-backed securities in their portfolio.
The Fed is now beginning to sell off that inventory, see here. This could have the effect of increasing supply in the marketplace and thereby reducing the price of the securities.
This reduction in the securities price will cause the interest rate tied to the security to go up.
So, again, the Federal Reserve can influence the interest rate, but they do not have a direct effect on it.
A real mortgage consultant will track this for you, help you monitor the trend in rates, and guide you toward the right actions for your specific situation.
Remember that even though the interest rate is not the most important factor for your mortgage, your real mortgage consultant will track it for you and put it in the right perspective for you