How Are Home Mortgage Rates Determined

The housing market is constantly experiencing fluctuation with mortgage rates and homeowners usually have very little knowledge with how home mortgage rates are determined. Home mortgage rates are determined by a number of factors, each effecting rates in a positive or a negative way. Getting a good grasp on what affects mortgage rates will help investors and home buyers make better decisions when investing in a new home. In fact, many investors who invest in the housing market should have a complete understanding of what affects mortgage rates before they make an investment. One of the main factors that individuals should take a look at is the 90 day US Treasury bill.

Mortgage rates are determined by the amount of risk, or the absence of risk associated with the market. The 90 day US Treasury bill is used a measuring device when determining future mortgage rates. In fact, the 90 day US Treasury bill is considered the benchmark when dealing with risk free interest rate determinations. However, inflation factors and other factors also need to be considered. Risk free interest rates on mortgages actually don’t exist. Regardless of this fact, many investors will still take the 90 day US Treasury bill into consideration when forecasting future mortgage rates.

The first aspect to look at when determining mortgage rates is the inflation premium. The inflation premium deals with the amount that inflation moves, up or down. If inflation is expected to go up over the next few years, the mortgage rate will be adjusted allowing the lender to cover the inflation rate. In other words, mortgage rates are adjusted to cover risks against the direction of inflation. Lenders will still want to earn a return on interest, even if inflation rises over the life of the mortgage contract.

The next aspect that affects mortgage rates is called the default risk premium. The default risk premium is basically the amount of risk the borrower poses to the lending institution of the mortgage. If a borrower is considered a high risk, the mortgage rate will be adjusted accordingly to cover the risk. If the borrower defaults on their mortgage, the lender will have earned more interest on the loan during the time in which the borrower made their payments. In other words, the lender makes more interested than expected with other borrowers who are not considered a high risk.

Another aspect that is known to affect mortgage rates is called the liquidity premium. Liquidity premiums deal with how much liquidity the market is producing, especially in the housing market. For example, if home purchases are rising and the demands for new homes are high, the market is considered having a lot of liquidity. In other words, if it is easy to sell a home, it will be easy for the lending institution to unload their ownership. This creates liquidity in the markets. However, if it is extremely difficult to sell a home, then the market is considered not having liquidity.

A maturity premium is another aspect that is used to determine mortgage rates. Maturity premiums deal with how long the investment will take place. All these factors added together will determine what type of rates is associated with mortgages. Because these factors are constantly shifting and moving around, mortgage rates will adjust accordingly. Understanding these factors will help anyone decide when is the best time to buy or sell their home. Mortgage rates are the deciding factor if an individual wants to sell or buy a home. Investors who invest in the housing market will also have a great understanding of these factors as well.