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How your mortgage rate is set

Ever wonder how your mortgage rate is set? Or do you feel it’s an impenetrable “black hole”?

First you have to know that mortgages are long term lending. They are influenced by a number of marketplace factors including the federal funds rate set by the Federal Reserve. This is the rate banks use to lend money to each other, and when these short term rates go down, people borrow more, spend more and all this effects the mortgage lending rate.

Another factor is the Mortgage Backed Securities bond prices. When the price of these bonds issued by Fannie Mae and Freddie Mac go up, the interest rates go down…conversely when bond prices plummet, rates go up. If there is concern about inflation, again watch the rates go up. Unfortunately there is no man sitting in an ivory tower manipulating rates that you can conveniently blame.  The old as time factor of “supply and demand” determine the mortgage rate you pay.

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