The decision to purchase a home is always accompanied by the desire to find a low interest rate. The lending institution which provides the loan is usually credited for same if the rate is low and similarly, the lender is likely to be criticized if it is viewed as too high. Many people are unaware of the factors driving mortgage rates. In truth, lenders do not have too much say in determining interest rates. Secondary market investors do.

The mortgage lender who provides the borrower with the loan is known as the originator. This is usually a bank, credit union or other financial institution. Once the loan has been funded and the homebuyer has the money, the originator has two choices. It can either keep the loan as part of its portfolio or sell it to investors on the secondary market.

With the first scenario, the institution makes money through the interest paid by the borrower. If however, the originator decides to sell the loan to a secondary investor, it is in effect replenishing its source of funding through this sale. In this way, it puts itself in a better position to provide more loans to other potential homeowners.

In other words, the secondary market investors keep the cycle of funds circulating, thus ensuring that money is always available to loan originators to fund new mortgages. Secondary market investors are usually insurance companies, pension funds, government chartered companies and securities dealers. They play a large part in determining the ups and downs of mortgage interest rates.

In purchasing loans from originators, these investors want to ensure the best return on their venture. The state of the national economy, current as well as anticipated, is what determines the level of return to be had. An economy climbing upward is an indication that better returns will be had in the future rather than presently. So, investors hold back from buying loans until higher profits can be realized in the future. This action triggers higher rates, because lenders cannot sell lower yielding loans.

On the other hand, when the economy is on a downturn, secondary investors quickly buy from the originators, so as to avoid having too many low yielding products on their hands later on. Rates are then driven down as a result. In this way, investors in the secondary market play a significant role in driving rates which in turn impact prospective homeowners.

As such, in attempting to get the best rate, it would take more than just an academic interest in the marketplace. Keeping abreast of financial trends is imperative, though that may mean more time energy and effort invested. In the long run, knowledge of the system, proper planning and impeccable timing may well pay off by locking in an unbeatable rate.

That being said, be warned that the lower mortgage rates may not necessarily be the best. Closing costs which are the additional fees required for the legal transfer of property ownership to the buyer can be significant. It is always best to enquire about the total cost, spread over the entire life of the loan, so as to get a clear indication of all the costs, seen and unseen, which are involved.

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Category: Real Estate
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