Many people believe that interest rates are simply set by lenders, but the reality is that mortgage rates are largely determined by what is known as the secondary market.
The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc., and then either hold them for their earnings or bundle them and sell them to other investors. When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.
That market price of those Mortgage Backed Securities (MBS) is what impacts mortgage rates.
Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments.
This perception of safety is due to the implied government backing of Fannie Mae and Freddie Mac, and the fact that the Mortgage Backed investments are based on real estate collateral. So, if the loan defaults there is real property pledged against potential losses.
In contrast, other investments are considered more risky, specifically stocks which are based on earnings and profit vs. real property. The movement between the two investment vehicles often dictates mortgage rates.
For more information, visit the Academy Mortgage website.
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