What Drives Interest Rates

Our SVP wrote this article and I thought it would be of value for you to read.

The recent Federal Reserve .25% rate decrease will often cause confusion for consumers when it comes to long term mortgage rates. The Federal Reserve’s monetary policy directly impacts the cost of funds. This mechanism is used to stimulate consumer spending and will adjust based on several economic factors. Directly, the Fed’s decision to lower its rate will reduce shorter term loan rates, such as car loans, unsecured installment loans and revolving credit loans such as lines of credit and credit cards.

Generally speaking, long term rates are more directly impacted by the following components:

 Bond market

 Supply/Demand of mortgage backed securities

 Overall economic conditions

Indirectly, overall loan performance factors and the Fed’s monetary policy will contribute only a minor influence on mortgage rates. The markets and media often know the Fed’s monetary policy and rate decisions well before they are announced. While not full proof, the anticipated decision for a rate increase or decrease is already baked into the driving forces determining long-term mortgage rates.

The 10-year Treasury note serves as a key index that fluctuates with long term mortgage rates. A common misperception is that this index determines mortgage rates.

Mortgage loans are packaged into groups of securities and then sold in the market. The price of these debt securities is usually driven by national and global news events, which then impacts mortgage rates.

Additionally, as notated by the consumer financial protection bureau, there are seven key factors that directly affect a consumer’s mortgage interest rate.*

1. Credit Scores – higher credit scores often qualify for lower interest rates compared to lower credit scores. This is simply a measure of loan performance risk while determining the likelihood for a loan to be repaid.

2. Home location – State and municipal areas pose certain elements of risk that can play a part of your qualifying loan rate.

3. Home price & loan amount – There are key lending limits for mortgage loan products that vary by geography and average household incomes.

4. Down payment – Generally, a larger down payment, or the higher the equity position with a refinance transaction, will usually help you get a lower interest rate.

5. Loan term – Perhaps an under discussed topic! A 15 year fixed-rate conventional loan term will have a significantly lower interest rate compared to a 30 year fixed-rate loan. Yes, the payment will be higher, but the rate of interest and total finance charges over the term will be significantly cheaper.

6. Interest rate type – fixed or adjustable? An adjustable rate mortgage (ARM) will have an introductory period for the first five or seven years. This initial period of time will have a lower interest rate compared to a fixed rate mortgage (FRM). However, there are certain elements of risk that the consumer needs to consider when comparing a fixed-rate and adjustable-rate mortgage loan.

7. Loan type – Broadly, there are several types of mortgage loans: Conventional, FHA, USDA, VA, Non-conforming jumbo & state specific down payment assistance loans. All of these programs are different in complexity as they are associated with varying federal and state organizations.


NOTICE: For informational purposes only. Information and/or data is subject to change without notice. This is not a commitment to lend or extend credit. All loans are subject to credit approval including credit worthiness, insurability, and ability to provide acceptable collateral. Not all loans or products are available in all states. ENG Lending and Bank of England are not affiliated with any government agency. ENG Lending is a division of Bank of England. NMLS 418481. Member FDIC.

Andy Voyles serves as a senior manager for Bank of England Mortgage, a 22 year veteran of the mortgage banking industry.



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