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How Interest Rates are Determined

Shopping Around?
Here’s the inside scoop on how to do it right!

Make sure you are working with an experienced, professional Loan Officer. A large financial transaction requires someone capable of advising you properly and troubleshooting the issues that may arise along the way. But how can you know if your lender fits the bill?

Here are four simple questions your lender must be able to answer correctly. If they do not know the answers RUN – don’t walk – to a lender that does.

1) What are mortgage interest rates based on?  The only correct answer is mortgage-backed securities or mortgage bonds, NOT the 10-year Treasury note.  While the 10-year Treasury note sometimes trends in the same direction as mortgage bonds, it is not unusual to see them move in completely opposite directions.  DO NOT work with a lender who has their eyes set on the wrong indicators.

2) What is the next Economic Report or event that could cause interest rate movement?  A professional lender will have this information at their fingertips.

3) What does it mean when Bernanke and the Fed “change rates,” and what impact does this have on mortgage interest rates?  The answer may surprise you.  When the Fed makes a move, they may change a rate called the “Fed Funds Rate” or “Discount Rate.”  These are both short-term rates that impact credit cards, home equity credit lines, auto loans and similar finances. When there is a Fed move, mortgage rates will usually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation.  

4) Do you have access to live, real-time mortgage bond quotes?  If a lender cannot explain how mortgage bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday’s newspaper.  This is dangerous and would be like working with a stockbroker who can tell you how a stock traded yesterday, but does not have a clear sense of how it would trade today, or in a few hours.  A professional lender will understand today’s rates and which market conditions could cause rate changes in the near future.

Be smart...  Ask questions…  Get answers!

Purchasing a home is a large and important financial transaction. Most homeowners only purchase a home a handful of times throughout their entire lives, but we do this every single day.  It’s our profession and our passion. We're ready to work for your interests.

Contact us with all loan questions and prequalifications!
512.380.1922 or Leahy@LeahyLending.Com

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