- How are mortgage interest rates determined?
We're gonna talk all about all the different factors,
and we're getting started right now.
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Hey, what's going on?
Emmett Dempsey, mortgage broker
and owner of Treasure Coast Mortgage,
here in Port St Lucie, Florida,
and welcome to another video.
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And with that out of the way,
let's go and talk about mortgage rates.
Okay, how are mortgage interest rates determined?
Now, so often there's a lot of misinformation out there,
you see a lot of things quoted, a lot of fine print.
Well, what's your rate?
Like that's a, a question I get is like,
hey, what's your rate?
You know, shop around now, what's your rate?
So the, there's, the answer to that question?
You know, like I always say, the answer is, it depends.
There is a few different factors that go into
what your interest rate would be,
and everyone's interest rate's different,
and it's based off a set of principles, you know?
And first of all, we start with market-based forces.
Okay. So the core of any mortgage rate
has to do with what's going on in the economy,
and how is that reflected in the economy?
It's in the bond market?
So this thing is called mortgage backed securities.
So if you imagine all of your neighbors' mortgages,
that are all, you know, all your neighbors,
all their mortgages are packaged into one piece of paper,
called a mortgage backed security,
and that's traded on, on the bond market.
And, you know, your pension funds,
and big insurance companies
who need to fund your obligations,
they they buy these bonds,
because they pay a rate of return.
So, based on the rate of return that they pay,
it's based off of things like inflation,
the economic news.
So usually if, you know, unemployment,
all those economic factors go into how
the pricing on those mortgage bonds are determined.
And ultimately the core of those mortgage backed pricing,
that's gonna determine the core economic interest rates.
So, you know, I know last year in 2020,
in lieu of COVID, you know,
we had some business closures and shutdowns.
And so once a stimulus needs to go into the economy,
you know, usually the inflation is tampered down
because there's not a lot of economic activity,
so rates will drop.
And then usually when the economy is roaring,
it happens the other way, where the inflation is going up
because you have to hire more people to keep up,
and so interest rates pressure is upwards.
So that's just, the core of interest rates
will be the economy.
So right now we're in a very good interest rate market.
You know, I've been doing mortgages since 2007,
when 7% was all the rage, and you know,
now rates are in the twos and I can even touch the ones,
the high ones.
So it, it's definitely a great area to be in.
So number one is the economic factors.
Okay?
Number two, so that forms the base rate.
So the next 'how' is to determine your risk,
your loan's risk.
It all starts, as you may know, understand it,
is your FICO score.
Okay? So we use the FICO score,
not the advantage or,
and I don't like that, usually it's FICO version four.
And we take the middle FICO score
out of the three major bureaus.
So, FICO score is going to determine one thing.
Also, the type of mortgage it is,
because there's VA, there's FHA, USDA.
Different loan types of different loan features.
For instance, FHA and VA are government insured,
so the risk of those loans of default is lower.
So therefore they can lower that interest rate.
Whereas conventional loans,
without mortgage insurance,
you know, there's no assurance of the lender
to make those loans so that they price that risk higher.
So generally the starting interest rate for everyone
is just higher on a conventional loan versus FHA and VA.
You know.
I have some other FHA videos that go in
FHA versus conventional, all of those different details.
So go ahead and check this video out.
So yeah, so it all depends on, number one, your FICO;
the loan type, you know, is it conventional;
and usually the the FICO will tell me which way to go,
based on, also, your personal situation.
You know, say you had a short sale foreclosure
within the three years or more, so you would have to go FHA.
So, you know, I'll tell them--
that's why I say your interest rate will different
from your neighbor's interest rate
because of your personal situation.
So, you know, which way do we go.
So that's how we determine, you know,
the interest rate on FHA, starts with your FICO,
and then it gets priced based on risk.
Also the certain property, if you're buying a condo,
that's going to be more risky because you're sharing walls,
it's deeded differently, it's harder to sell.
You know, single family homes generally have lower rates
because they're easier sold,
and it's just, there's lower risk.
So, you know, FICO's a consideration, loan type,
and also how much you're putting down on a purchase.
If you put down more, you know,
you usually put down 40%, and your risk is lower
because you're building lot equity in;
or if you're putting down, you know, the minimum,
you know, of course that rate is going to be risked higher.
But also, they mitigate that risk
with what's called mortgage insurance.
And it's interesting,
sometimes if you can get a little bit of mortgage insurance,
like if you could put down 15% versus 20,
you know that loan, the conventional loan is insured.
You know, there may be a little bit lower rate
because lower risk.
So, aftermarket worth sources are risk-based sources.
You know, like I said, it comes down to your FICO,
comes down to how much you're putting down
on refinancing loan to value,
of, if it's a single family home,
the loan, the property type,
but also if it's owner-occupied.
So if you're buying investment property
you're having to put more money,
the rate is higher because of the rate of default.
So, you know, after the core and market rate,
they determine your, your risk rate.
And that's how we come up with your interest rate.
And what I always do, also, is have you, I have choices.
What I always present is options.
Like here's, with no points, you know,
and here's buying down points,
and it may or may not make sense,
but ultimately there's no--
the answer to the question 'what's your rate?'
is always, it depends on what your goals are.
So my job for you is to lay out all of your options,
what's possible, and then you execute on the solution
that works best for you and your family.
So, that's how mortgage interest rates are determined.
You know, these videos right here,
I'm going to talk about some more cool mortgage topics.
Thank you so much for watching,
and I'll see you guys on the next one.