Mortgage rates depend on the money supply, or "liquidity" of our economic system and rules set by organizations that guarantee mortgages. Each federally guaranteed lender offers different rates to different borrowers according to a complex set of guidelines.

Rates

The Federal Reserve Bank and U.S. Treasury set the federal discount rate and T-Bill rates. These prime rates affect only transactions between banks. They do not set mortgage rates but they are indicators of how much and in which direction mortgage rates will move.

Standards

The Federal National Mortgage Association (Fannie Mae) and Federal Home Mortgage Association (Freddie Mac) are government-sponsored enterprises (GSEs). They guarantee loans and set mortgage guidelines for direct lenders.

Type Guidelines

Single-family, multiple-family, owner-occupied, investment properties and other dwellings receive different interest rates. Rates also vary by type of rate: fixed, short or adjustable.

Risk Guidelines

Rates are also adjusted for risk factors including the loan amount compared to total property value (percentage), the debt-to-income rate of the borrower and the borrower's credit score.

Term Guidelines

Fixed term mortgages for longer periods carry higher rates because the debt must be monitored, or "serviced" for longer. Short second mortgages and home equity loans carry higher rates than fixed primary mortgages, though, because of increased risk.

Local Banks

Local banks are responsible for administering guidelines and servicing loans. They may add percentage "points," fees or interest consistent with guidelines and prevailing rates.

Source:

Brad Chadwick, mortgage specialist; Farmers and Merchants Bank; Waterloo, Wisconsin.

Mortgage Loan Directory and Information: Federal Open Market Committee

Mortgage News Daily: MBS and Mortgage Rates

More Information:

Federal Reserve Bank of San Francisco: Federal Discount and Mortgage Rates

Fannie Mae

Freddie Mac