When you are looking for the mortgage loan that is right for you, you will discover something: interest rates are constantly changing. You may wonder why rates change so often, and what this means for you when getting a home loan.

To understand mortgage interest rates, it helpful to understand a simple concept: banks and investors make money when they loan you money. For instance, your bank or lending institution probably borrows money daily from the Federal Government. These loans are linked to the Federal interest rate, or prime rate, and are known as the overnight borrowing rate. Your bank will want to charge you more interest on loans you make with them, than they are paying the government - which is one reason mortgage rates are higher than the prime rate.

Other factors can also affect mortgage rates, including the rate of return on investments your lending institution makes on short- term investments such as T-bills (Treasury bills); medium-length investments (treasury notes), and long-term investments and loans (treasury bonds).

Who owns the Money That I Borrow?

One of the biggest factors in determining mortgage loan rates is how much money mortgage investors make on their investments, since the funds for many mortgages come from these investors with good credit.  They often invest in 10-year bonds ('long bonds'), then use that money to invest in mortgages that will pay them an even higher rate of interest, through the two main entities for investing in home mortgage securities: the Federal National Mortgage Association, or FNMA, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, or FHLMC, commonly known as Freddie Mac. The higher the interest rate on their bonds, the more money they have to invest in mortgage securities, which links long bond rates to mortgage interest rates.

Since the objective of investors is to make money from their loans, mortgage interest rates will always be higher than the current bond rates.  Ginnie Mae works in a similar manner, with investors buying and selling mortgage securities that can affect FHA and VA loan interest rates.

When the economy is slow, inflation is usually low, and interest rates are lower. Investors buy Fannie Mae and Freddie Mac bonds at lower interest rates, with the result that mortgage interest rates drop. Also, a slow economy means that less people have money to spend on mortgages. There is less of a demand for credit, so mortgage rates drop. Conversely, when the economy is strong, there is a higher demand for credit, and interest rates increase.  As a result 'supply and demand' is a real factor in the world of housing loans.

What About APRs and Points?

You may see the term annual percentage rate (APR) when applying for a home loan. This is a method of calculating interest rates on a loan, that includes not only the loan interest rate, but also the finance and processing charges that the lender charges you (points) plus the insurance costs. Our alliance with bad credit brokers allows you to compare different rates - with one easy application.