Kathryn Jean Keller

NMLS# 57801 • Mortgage Loans

How Are Mortgage Rates Determined?

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How Are Mortgage Rates Determined?If you’ve been paying attention to the mortgage rate news, you may be wondering exactly how it is banks decide what mortgage rates to offer. Do they just pick a number at random? Mortgage rates may seem somewhat arbitrary, but there’s actually something of a science to them.

So how does your bank or lender determine what your interest rate will be? Here are just some of the factors that go into the equation.

Rates Always Account For Inflation

First and foremost, every mortgage interest rate needs to account for inflation. Inflation is the average annual change in purchasing power brought about by changing economic conditions. When inflation goes up, money loses purchasing power and when it goes down, money gains purchasing power.

For example, an annual inflation rate of two percent means that a $100 bill minted in 2014 would be able to buy just $98 worth of goods in 2015. Mortgage interest rates always take the inflation rate into account, because if your bank’s mortgage rate were lower than the rate of inflation, your bank would actually lose money on your mortgage.

The Default Risk Premium: Your Likelihood Of Default Impacts Your Rate

The default risk premium is a rate that your lender adds to the inflation rate in order to mitigate the risk of not recovering the loan. Different kinds of loans carry different risk levels, and your lender needs some way of staying profitable even when losses happen. The default risk premium helps your lender to profit more on high-risk mortgages, which mitigates the problems associated with a default.

The more at risk of defaulting on a loan you are, the higher this premium will be.

The Liquidity Premium: Can Your Lender Recoup Potential Losses?

The liquidity premium is similar to the default risk premium, but rather than addressing the possibility that the borrower might default, this premium mitigates the risk of not being able to re-sell the property after the borrower defaults. If a borrower enters default, the lender’s only option is to sell the property in order to recover its losses. However, a home is a non-liquid asset, and it’s very difficult to turn a home into cash and the liquidity premium compensates the lender for the additional time and effort it takes to sell a non-liquid asset.

Mortgage rates may seem like sorcery, but there’s a clear science and a logical method involved in calculating rates and premiums. To learn more about mortgage rates, or to find out what kind of a mortgage rate you may be eligible for, contact your trusted local mortgage professional.

NAHB: Home Builder Confidence Holds Steady in May

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Closing Paperwork: How to Read and Understand the Truth-in-Lending Disclosure StatementThe National Association of Home Builders reported that home builder confidence in the U.S. housing market conditions held steady for the fourth consecutive month in May. Builder confidence stayed at a reading of 58, which was the number expected by analysts and was also the reading for April. Analysts said that the consistency in readings signified expansion in housing markets. Any reading over 50 indicates that more builders than not are confident about market conditions.

Components of the NAHB Housing Market Index include readings on builder confidence in current market conditions which held steady at 63 and builder confidence in market conditions over the next six months, which gained three points to a reading of 54. Builder confidence in foot traffic for new home developments was unchanged at a reading of 44.

NAHB Chief Economist Robert Dietz said that the higher reading for future sales indicates growing builder confidence in housing market conditions. In recent months, housing markets have been fueled by low mortgage rates and high demand, but supplies of available homes are dwindling. Housing industry analysts have identified building new homes as a major solution for the shortage of homes for sale.

Analysts note that while new homes represent a small part of the residential real estate market, each new home constructed contributes an average of three jobs for a year and yields an average of $90,000 in tax revenue for each home built. Builders repeatedly cite a lack of workers and buildable lots as a concern for building more homes. An NAHB analysis of the Bureau of Labor Statistics’ report on Job Openings and Labor Turnover indicated that there were 210,000 unfilled construction jobs in March, which was the highest reading since May 2007.

Regional surveys of home builder sentiment were mixed. The reading for the Northeast fell by 3 points to 41 while readings for the Midwest and South rose by one point each with readings of 58 and 59 respectively. The reading for the West was unchanged at 67.

Low Mortgage Rates: Will the Fed Raise Rates in June?

In other housing related news, analysts’ predictions are mixed regarding whether or not the Federal Reserve will raise its target funds rate next month when the Federal Open Market Committee (FOMC) meets. Uncertainties over the United Kingdom’s upcoming vote about leaving the European Union and mixed economic data appear likely to nix a rate increase, but improving labor markets could be a plus for a fed rate increase. Raising the federal funds rate would cause mortgage rates to rise and is considered a further concern for the gap between growing wages and rapidly rising home prices. 

What’s Ahead For Mortgage Rates This Week – May 16, 2016

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Whats Ahead For Mortgage Rates This Week December 21 2015Last week’s economic news included reports on retail sales and consumer sentiment along with weekly releases on new jobless claims and mortgage rates.

Retail sales jumped 1.30 percent in April as compared to the March reading of 0.30 percent. Retail sales excluding the automotive sector rose from 0.40 percent growth in March to 0.80 percent growth in April. Both retail sales reports exceeded expectations. Growth in consumer spending suggests higher confidence in economic conditions and may lead potential homebuyers to consider buying rather than renting their homes.

Consumer sentiment jumped in May to a reading of 95.8 as compared to an expected reading of 89.5 and April’s reading of 89.0. This reading further supports easing of consumer concerns over current economic conditions and could bode well for housing markets as the peak sales season continues. May’s reading was the highest in nearly a year according to the University of Michigan, which conducts the Consumer Sentiment Survey.

Mortgage Rates Fall, New Jobless Claims Rise

Housing markets received a boost as average mortgage rates reported by Freddie Mac fell. The rate for a 30-year fixed rate mortgage fell by four basis points to 3.57 percent; the rate for a 15-year fixed rate mortgage was five points lower at 2.81 percent. The average rate for a 5/1 adjustable rate mortgage was two basis points lower at 2.78 percent. Discount points averaged 0.50 percent for all three types of mortgages.

In spite of good economic news, lower mortgage rates and higher consumer sentiment, new jobless claims jumped to a 14-month high of 294,000 new claims from the prior week’s reading of 274,000 new claims and expectations of 270,000 new claims. Analysts said this increase could indicate softening of labor markets. Putting last week’s urge in claims in perspective, new claims remained below the benchmark reading of 300,000 new claims for 62 consecutive weeks, which is the longest period since 1973.

Labor laws in New York State likely influenced the jump in claims as certain school workers are allowed to file for unemployment benefits during spring break. A strike by some telecommunications workers likely contributed to the abrupt rise in new jobless claims. Analysts noted that New York allows striking employees replaced by their employers while on strike to collect unemployment benefits, and that new claims were near historically low levels in all other states.

What‘s Ahead

This week’s scheduled economic reports include the National Association of Home Builders Housing Market Index and Commerce Department reports on housing starts and building permits issued. Monthly reports on inflation are also expected.The National Association of Realtors® will release its report on existing home sales. Weekly reports on new jobless claims and mortgage rates will also be released.

What’s Ahead For Mortgage Rates This Week – May 9, 2016

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Closing Paperwork: How to Read and Understand the Truth-in-Lending Disclosure Statement

Mortgage rates fell across the board last week according to Freddie Mac’s Primary Mortgage Market Survey. Other economic news included reports on construction spending, public and private sector employment and national unemployment.

Construction Spending Grows in March

The Commerce Department reported that the growth rate for construction spending fell in March to 0.30 percent/Analysts expected a reading of 0.70 percent based on February’s upwardly revised growth rate of 1.0 percent. Construction spending was propelled by a 1.50 percent increase in residential construction spending; this is good news for would-be home buyers who’ve been shut out of the market due to high demand and low inventories of available homes.

Housing market analysts have repeatedly said that new home construction is the answer to short supplies of homes and high buyer demand. Year-over-year, construction spending is up 8.0 percent overall; residential construction spending grew by 7.60 percent year-over-year.

Mortgage Rates Dip

Average mortgage rates were lower last week. The rate for a 30-year fixed rate mortgage fell by five basis points to 3.61 percent; the average rate for a 15-year fixed rate mortgage was three basis points lower at 2.86 percent and the average rate for a 5/1 adjustable rate mortgage dropped six basis points to an average of 2.80 percent.

While any drop in mortgage rates is welcomed by home buyers, the high demand for homes continues to drive prices up and has raised concerns about affordability of single-family homes in many communities.

Jobs Growth Slows

The national unemployment rate held steady at 5.0 percent in April, but job growth slowed in public and private sectors. ADP reported private sector jobs increased by 156,000 jobs as compared to 194,000 jobs added in March. According to the Bureau of Labor Statistics, Non-Farm Payrolls increased by 160.000 jobs as compared to expectations of 203,000 jobs added and March’s reading of 208,000 jobs added. Non-Farm payrolls measure public and private sector job growth.

New jobless claims rose by 17,000 to 274,000 new claims, but remained below the benchmark of 300,000 new claims for 61 consecutive weeks. Analysts projected that new claims would grow by 265,000 new claims based on the prior week’s reading of 257,000 new claims. The less volatile four-week rolling average of new jobless claims indicated that 258,000 new claims were filed. The labor force participation rate dropped from 65 percent to 63 percent in March. Retiring baby boomers contributed to some but not all of this workforce decline.

What’s Ahead

This week’s scheduled economic news includes weekly reports on mortgage rates and new jobless claims along with a report on consumer sentiment.

What’s Ahead For Mortgage Rates This Week – April 25, 2016

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What's Ahead In Mortgage News

Last week’s economic releases included Existing Home Sales, Commerce Department Releases on Housing Starts and Building Permits and the National Association of Home Builders/Wells Fargo Housing Market Index. Mortgage rates and new jobless claims were released according to their weekly schedule.

Home Builder Confidence Holds Firm in April

According to April’s National Association of Home Builders/Wells Fargo Housing Market Index, home builder confidence held steady with a reading of 58 for the third consecutive month. Analysts viewed April’s reading as a sign of steady expansion for home building, but builders noted concerns over labor shortages. NAHB Chief Economist Robert Dietz said that builders were “cautiously optimistic” concerning housing market conditions.

The National Association of Realtors® reported a jump in sales of previously owned homes in March. The seasonally-adjusted annual rate of sales rose to 5.33 million and surpassed expectations of 5.30 million sales and February’s reading of 5.07 million sales of pre-owned homes.Mr. Lawrence Yun, chief economist for NAR, said that demand is increasing and noted that the national average home price increased more than twice as fast as average wages.

In other housing-related reports, the Commerce department reported slower growth in housing starts, which reached 1.089 million starts in March. Analysts expected 1.170 million starts based on March’s reading of 1.194 housing starts. Building permits were also lower with 1.086 million building permits issued as compared to 1.177 million building permits issued in March.

National Association of Realtors®: Sales of Pre–Owned Homes Exceed Expectations

March sales of previously owned homes reached a seasonally-adjusted annual rate of 5.33 million sales against predictions of 5.30 million sales and February’s reading of 5.07 million sales. While March sales of pre-owned homes coincide with the approaching peak home selling season, high demand for homes and low supplies of homes for sale could slow sales. Inventories of available homes are currently at a 4.5 month supply; a six month supply of available homes indicates a normal reading for available homes.

Mortgage Rates Mixed, Jobless Claims Lowest Since 1973

Freddie Mac reported mixed results for last week’s average mortgage rates. The rate for a 30-year fixed rate mortgage was one basis point higher at 3.59 percent. The rate for a 15-year fixed rate mortgage was one basis point lower at 2.85 percent while the average rate for 5/1 adjustable rate mortgages fell by three basis points to 2.81 percent. Discount points averaged 0.60 percent for fixed rate mortgages and 0.50 percent for 5/1 adjustable rate mortgages.

Weekly jobless claims dropped to their lowest level since 1973 with a reading of 247,000 new claims filed. Analysts expected a reading of 265,000 new claims filed based on the prior week’s reading of 253,000 new claims filed. Strong labor markets can be an incentive to home buyers to move up to larger homes or transition from renting to owning, but short supplies of available homes and rapidly rising home prices present obstacles. First-time buyers account for approximately 30 percent of home sales; their participation could diminish unless available homes increase and demand for homes eases.

What‘s Ahead

This week’s scheduled economic reports include the S&P Case-Shiller Home Price Indices along with new and pending home sales reports. Weekly reports on mortgage rates and new jobless claims will be released on schedule.

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