Who sets mortgage rates? 

Why do rates change? 

How often do rates change? 

Why don’t all lenders have the same rates and fees? 

Many factors affect mortgage rates. Economic activity impacts the movement of mortgage rates but for the most part, actual mortgage rates are largely determined by the “secondary market” – or Mortgage-Backed Securities. MBS are pools or groups of mortgages packaged into securities for sale to investors in the secondary mortgage market. 

For simplicity’s sake let’s define the secondary market as being controlled by the primary government entities – FNMA, FHLMC, FHA and VA. These entities set a guaranteed price to buy or insure a certain type of mortgage. These “base rates” change daily, or more often during times of volatility, based upon the markets. 

Generally, all mortgage lenders have access to the same base rates. But after they receive the daily base rate for the particular type of mortgage they are pricing, lenders must then establish their “daily rates.” Individual lenders’ daily rates will vary, depending on their cost-to-produce and their business model. Are they pricing aggressively (low SRP) to drive high volume? Or they may price above market (high SRP), if they have a captive mortgage audience. 

There are two ways for lenders to make money on a loan. 

The first is from the “disclosed income” – those fees that are charged or earned when a loan funds and which are fully transparent to you and your buyer. These fully disclosed charges are now capped by Federal Law at a maximum of 3.00%. 

The second source of income is from what I call “undisclosed income.” This undisclosed income is called Service Release Premium – or SRP. 

The combination of all of these factors determine what your buyers will actually pay to get their loan. Here is what that would look like: 

Base Rate = set by the secondary market (including Risk Adjustments) 

+ Service Release Premium = Undisclosed Income which varies by lender 

+ Collected Fees = Disclosed Income which is capped at a 3% maximum 

Interest Rate & Fees – that your buyer will pay to get their loan. 

For the most part, that explains who sets rates and why rates vary between lenders. But there is another factor which affects the interest rate that a particular buyer may pay. I call this the “risk adjustment.” When you obtain a loan, you aren’t the only one taking a risk–the lender is also taking a risk on you. In general, the higher the risk, the higher the cost of borrowing money. The secondary market has priced these risk factors into their base rates. They do this by issuing a “pricing adjustment” rate sheet schedule. Included in their base rate are additions or subtractions to the loan pricing. In other words, factors such as FICO score, down payment, and loan amount will determine your final interest rate. 

I believe it is a Realtor’s job to try to get their buyers the best deal possible for their mortgage loan. And having a little knowledge of how rates are set may help you explain to a buyer how their particular rate was established. 

“An inves tment in knowledge always pays the best interest.” 

Benjamin Franklin 

I hope I’ve helped you to understand how to get your buyers the best interest rate for their situation.