Whether you are purchasing or refinancing achieving the most competitive mortgage rate is the goal for most consumers. While the source or place of origination/application is important (banks, mortgage bankers, mortgage brokers, etc.,), sheer competition dictates most price their product the same.
The 30 year Fixed Rate product is the benchmark in discussing mortgage interest rates. Lenders use the 10 year Treasury Security as the base for establishing what price will be offered to consumers. The 10 Yr is traded everyday and moves throughout the day based on economic conditions. However, even though there is market movement, the 10 year is fairly stable.
Lenders will take the published trading rate and ADD an amount to it. That amount is known as their spread or part of cost to do business. Typically the spread will be between 1.680% – 1.800%. The variance is due to many factors such as consumer demand, current pipeline, etc. Using the most recent market as an example:
10 year Treasury (per Treasury Department) = 3.180%
30 year Fixed Rate (national average per Bankrate.com) = 4.820%
DIFFERENCE or SPREAD = 1.640%
1.640% is the spread used in determining consumer price for 30 year mortgage. So, whatever is going on with financial markets you can take the price from any day and add the spread to determine what should be defined as a competitive rate.
Not everyone selects a 30 year mortgage,. Depending on various strategies shorter term mortgages may be selected – 20 year, 15 year, 10 year and a variety of adjustable rate mortgages – 10/1 – Fixed for 10 years, then annual adjustments thereafter, 7/1 – Fixed for 7 years, then annual adjustments thereafter, 3/1 – Fixed for 3 years, then annual adjustments thereafter.
Consumers rely on a mortgage professional for assistance in securing their mortgage. Knowledge of how mortgage rates are controlled insures you have solid information in determining if the price is fair and competitive. Contrary to what some consumers think, lenders do not dictate interest rates, market conditions do. A lender earns their money and your business by providing service, knowledge and the ability to complete your transaction in a professional manner, based upon your expectations.
There are many factors in securing your mortgage. Consumer education is important and while you don’t have to be a Wall Street Guru or Financial expert, basic information is available as long as you take time to obtain it. Your knowledge of how the 10 year Treasury Yield relates to establishing the 30 year mortgage interest rate will be an asset in helping your mortgage professional provide service for you in closing your transaction
* Interest rates and index information change from time to time and figures quoted are for illustration purposes
Federal Reserve Bank
United States Treasury Department