How Lenders Set Rates

While mortgage lenders control who gets approved for a loan and on what terms, actual mortgage interest rates themselves are largely determined on the Secondary Market, where mortgages are bought and sold.

The Secondary Market or mortgage investors buy loans that lenders make and either hold them in a portfolio or bundle them with other loans into mortgage-backed securities. These are sold to Wall Street, mutual funds and other financial investors, who trade them much the same as Treasury securities and bonds.

It is these financial investors in the secondary market, not mortgage lenders and brokers, who collectively determine the interest rate of your mortgage loan. Interest rates move in cycles. As with the stock market, interest rates in the secondary market tend to move up and down. When the economy is on an upswing, investors demand higher yields, forcing lenders to raise mortgage rates. In a market downturn, rates tend to drop for consumers due to increased investor demand.

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