What determines mortgage rates?
Mortgage rates are impacted by a borrower’s credit score, the loan term, the mortgage program and a series of other market factors that are outside of the lender’s control.
It is a common misconception that the Fed sets mortgage rates. While the Fed’s policies may have an overall impact on rates, it doesn’t control the day to day changes in mortgage rates.
Mortgage rates are inversely tied to the value of Mortgage Backed Securities (MBS), which are bonds that are traded on wall street. When the demand for MBS goes up and their price goes up, mortgage rates go down. When the demand for MBS drops, mortgage rates go up.
The price of Mortgage Backed Securities is determined by many factors, but generally the most important is macro economic news. Better economic news, generally means good news for the stock market and bad news for the bond market. In general better economic news results in higher mortgage rates.
What is the difference between interest rate and APR?
The Annual Percentage Rate (APR) is designed to represent the “true cost of the loan” to the borrower, in order to prevent lenders from “hiding” fees and up-front costs behind low advertised interest rates.
The terms APR and nominal APR describe the overall cost of the loan to the borrower which includes the borrowers fees and costs, expressed as an annual interest rate.