// finance //
Mortgage Interest Rates
They keep dropping ‌ but how are they set? // by: easton crafts
88
/ NHOME / fall 2012
I
t is almost unbelievable to see how low 15- and 30-year mortgage interest rates are nowadays. While the average 15-year rate has now reached territory south of 3 percent, you may question how long they will stay this low and how the rates are set, anyway. Once a mortgage loan is closed, it is typically packaged in a bundle with other like mortgage loans to create a mortgage-backed security. This security can then be sold on Wall Street to investors much the same way treasury bills, stocks and bonds are sold. It is the price for which these mortgagebacked securities can trade that ultimately dictates the yield or interest rate that then trickles down to today’s interest rate environment. Similar to stocks and bonds, mortgage rates are subject to fluctuation; then it becomes a simple concept of supply and demand. Just like any other commodity, good or service, if demand increases, the price will eventually increase, too. The extra wrinkle in this equation, though, is that an increase in price of mortgage-backed security is good for interest rates because the