Nationwide Home Mortgage Loan Company Directory

What are Mortgage Interest Rates

Mortgage interest rates are simply summed up as an assignment of risk by the lender you are asking to loan you money. This risk is calculated by a few different factors that we will not get into in this article, however obviously the higher the risk the higher the rate.

Mortgages are secured by the property you own or are attempting to purchase which gives the mortgages a tangible value and the ability to be sold on the open market for a profit or loss depending on how the portfolio being sold performs.

Most people, mortgage loan officers as well, believe that when "The Fed" speaks on economic issues called the "Fed Fund Rate" it will adjust interest rates that this directly affects mortgages. This is simply not true, the fact is that this movement by the Fed is affecting short term interest rates and is most likely to affect car loans, credit cards and other short term loan products. In fact many times you will see mortgage rates heading in a different direction as indicated by Bernanke and his department.

All Interest rates are based on an index plus a margin. Inexperienced mortgage professionals assume that this only applies to adjustable rate mortgages or ARM's however the fact is that this combination is used to calculate all interest rates. The index is a measure of interest rates (usually the London Index Bank Exchange or LIBOR) generally, and the margin is an extra amount that the lender adds.

So, index plus the margin equals the rate. On a fixed rate the index, which may read 4.5%, is raised to let's say 5.2% to compensate for the future hills and valleys and then the bank adds their margin and the fixed rate is born. On an adjustable rate you get today's index which is at 4.5% the bank adds the same margin and you ride the market. The index can change up to three times a day depending on markets and world news.

The margin that banks add is the difference in interest rates between lenders. For example, if Wells Fargo is selling their portfolio of 30 year fixed mortgages on the street "Wall Street" and fetching a better price than lets say Chase is its fair to assume that the have a better performing portfolio. Meaning less foreclosures and more term payers.

Then it is fair to assume that they can add less margin to the index and come out with a lower fixed rate than their competiton.It is also fair to assume that the competition will begin to adjust the loans they make to ensure better penetration in the market to remain competitive.

The thirty year fixed rate is the litmus test for all other interest rates. Meaning, if the 30 year fixed is 6% and you wish to add or subtract to it you can expect changes in that rate accordingly. Foe example if the thirty year rate is six and you want a 20 year your rate should drop to sat 5.875%, even further for a 15 year. Conversely if you wanted a 40 year or interest only fixed rate the would travel in the opposite direction.

The easiest way to sum up interest rates is they are a measure of the daily market (Index) and how much profit (Margin) the bank can afford to work on. The biggest difference between interest rates usually occurs from the smaller lenders or brokers marking up this money and selling it to you. The markup in their defense serves as a cost of doing business from the retail side. Even the larger banks we mentioned above mark up the rates to cover the retail aspect of their operations. Usually more than the smaller lenders that operate more efficiently.