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Who Sets Mortgage Interest Rates

One challenge when shopping for a mortgage is deciding whether to lock in the current rate or wait to see if interest rates drop. While it is not an exact science, keeping an eye on certain treasury security rates will give you a good indication of potential changes in mortgage rates. Mortgage lenders price new loans.

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In this way, the secondary mortgage market determines mortgage rates. But there are still many answers to our original question. In one sense, the price at which the aggregator is willing to buy the loan from the lender determines the mortgage rate. But that price is based on the price at which the tranches of mortgage-backed securities are sold.

To get an idea of where 30-year fixed rates will be, use a spread of about 170 basis points, or 1.70% above the current 10-year bond yield. This spread accounts for the increased risk associated with a mortgage vs. a bond. So a 10-yr bond yield of 4.00% plus the 170 basis points would put mortgage rates around 5.70%.

Part of that research includes understanding who sets mortgage interest rates. No one bank or government entity "officially sets" current mortgage rates. Yes, it’s true – setting interest rates is a collaborative effort between different entities. But the Federal Reserve does wield plenty of influence.

A fixed interest rate is an unchanging rate charged on a liability, such as a loan or mortgage. It might apply during the entire term of the loan or for just part of the term, but it remains the same.

At their core, the interest rates that we pay on borrowed money for our businesses are set by the Federal Reserve. For mortgage loans, excluding home equity lines of credit, it includes the interest rate plus other charges or fees.

People unfamiliar with the VA loan program might assume that the Department of Veterans Affairs somehow sets or regulates the interest rates on these loans, but VA rules state that the VA has nothing to do with the interest rate negotiated between the lender and the buyer, except that the rates must be reasonable and customary.

Interest rates are not set by the laws of supply and demand. Each bank that has money to lend doesn’t independently set rates based on what the market will bear. At their core, the interest rates that we pay on borrowed money for our businesses are set by the Federal Reserve.