2020-10-27
2 Things to Know about Mortgage Interest Rates

Interest Rates

If you’re one of the many homebuyers, sitting on the sidelines waiting for prices to go down, I have news for you: You ought to be more concerned that interest rates might go up.

Come to think of it, this is also good advice for homeowners waiting for prices to rise before putting their homes on the market, and here’s why: Higher interest rates equate to lower borrowing power. Buyers on a budget may just be priced out of the market if interest rates go up, diminishing the pool of buyers available to purchase your home.

So, while it’s always a good idea to keep an eye on local real estate market statistics, watch economic forecasts as well to get an indication of what might be coming down the pike regarding interest rates.

1. Who determines interest rates?

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are privately held financial institutions, backed by the U.S. government. Although they aren’t owned or run by the government, they are known as Government Sponsored Enterprises or GSEs.

When you obtain a mortgage your lender will sell it on the secondary market. Typically it’s one of these two GSEs who will purchase it. They then bundle it with others into securities and sell them to investors who are looking for stable payments over the long haul.

These lenders have an interest rate ceiling, above which they will not buy the securities. This rate, in a nutshell, determines the rate that your lender will offer you. It makes sense, right? The lender needs to ensure it will be able to sell your mortgage, thus keeping the flow of money going for its other clients.

2. Why Mortgage Interest Rates Matter

Your monthly mortgage payment has four components: principal, interest, taxes, and insurance. To obtain a lower house payment, then, requires lowering one or more of these pieces. The obvious place to start is with the interest rate?

When looking at interest rates, what are typically considered minuscule fractions, such as 1 percent, are actually quite significant. “A one-percentage point difference in mortgage rates translates into at least a 10 percent difference in the monthly mortgage payment,” according to Jed Kolko, Trulia’s Chief Economist.

For the first-time homebuyer, the loan process comes with a steep learning curve. Don’t be afraid to ask questions and keep asking them until you get answers that help you understand the process.

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