How Are Mortgage Rates Determined - Who Determines the Rates

Ever say to yourself, "how are mortgage rates determined?" It's not just the big lenders like Freddie Mac and Fannie Mae. It's everyday people like you and I and others who are looking for a mortgage or looking to invest money who has a say in how mortgage rates are determined?

Usually the lender with whom you originally acquired your loan will sell it. Government-type agencies like Freddie Mac, Ginnie Mae and Fannie Mae will bundle your loan and others and create what is known as a mortgage backed security. The rate of return on these securities are based on the promise of mortgage payments and interest paid by borrowers. These securities are offered just like any other investment.

When we're looking for a sound investment and buy these mortgage backed securities through mutual funds or other types of investments, we expect a certain interest rate. In order to sell the securities, the securities must pay a rate of interest that is competitive with other sound investments like Treasury bonds. So if the yield on Treasury bonds go up, so must the yield on mortgage backed securities and therefore so do mortgage interest rates to handle those increases. Rates for 30 year mortgages usually follow right along with Treasury bonds. But since we keep mortgages about 10 years only, the 30 year mortgage rates follow just a little higher than 10 year Treasury bonds.