How Are 30 Year Mortgage Rates Set?

Despite the fact that it is currently the most popular type of mortgage taken out by American borrowers, many are still left with one question: exactly how are 30 year mortgage rates set? Many Americans don't understand the role of interest rates on the economy, or even know when it's an ideal time to buy a home. Learning a bit about how mortgage rates are set will help arm you with all the information you need to make the best decisions about financing a new home or property.

• The Role Of Treasury Notes When it comes to longer-term, fixed mortgages, mortgage rates are largely determined by the yield on treasury notes. 15 and 30 year mortgage rates are largely affected by this fluctuation in the market  Treasury notes are auctioned on the open market, and when there is a higher demand for the treasury notes, the yield is typically lower. When the demand is lower, yields are much higher in order to draw investors into the market. The yield on the treasury note is very close to the mortgage rate on fixed rate mortgages.
• The Role Of The Federal Reserve While 15 and 30 year mortgage rates are largely determined by the yield produced by treasury notes, variable mortgage rates are primarily dependent upon the Federal Reserve. The Federal Reserve meets each month to set a target rate for Fed Funds, or loans that banks make to one another. The rates of the Fed Funds largely determine the rates borrowers will be paying on a variable rate mortgage.
• How Interest Rates Affect You Mortgage rates are largely financial indicators that give consumers a pretty good picture of the overall state of the economy. High interest rates control inflation but also make the economy less active. Low interest rates will stimulate the economy, but an overactive economy can lead to inflation. When interest rates increase but the Gross Domestic Product decreases, it signifies the start of a recession. This is generally the worst time to seek out a mortgage or commit to fixed mortgage rates. When rates are low but the GDP is on the rise, it is the ideal time to take out a mortgage, as rates will be at their most favorable. The timing of your mortgage can literally save you thousands of dollars, or allow you to buy a bigger and better property.
• Variable Vs. Fixed If you're seeking 15 or 30 year mortgage rates, you're going to be looking for a fixed mortgage. In this scenario, your mortgage rate is fixed for the entirety of the loan, despite what's going on with interest rates and the economy. The advantage of this type of mortgage is that it allows you to lock in a good rate during an economically prosperous time. On the other hand, variable rate mortgages are offered at a few points above prime rate. These rates are generally offered over a shorter term, and vary from month to month with the Fed Funds rate. The advantage of this type of mortgage is that if the economy is in an upswing, you'll often save money over the safer fixed rate. However, due to the monthly fluctuation in your rates, it is a bit more of a risk.

Knowing the basics about how 30 year mortgage rates are set will help you make the most educated choice about what type of mortgage best suits your needs, and when it's most beneficial for you to lock in your fixed mortgage rate. While interest rates may seem like a minor and overly complicated issue in regards to buying a new home, choosing wisely can put thousands of dollars back in your pocket.

Source: "Mortgage Confidential: What You Need To Know That Your Lender Won't Tell You", David Reed; Amacom, 2006, 240 pp.