What determines the interest rate for repayments on a mortgage?

5 Responses to “What determines the interest rate for repayments on a mortgage?”

1. Jason F on March 15th, 2010 12:37 am

   Instead of locking in a fixed rate for their loans – which never change. . . . a lot of people chose the type of loan where the rate can fluctuate.

   I have no idea why a person would do this, but it can look more attractive (and let you stretch for more house than you can afford) in the short term.

   Those people are now paying for it when their rates get jumped up, and their payments skyrocket

2. leysarob on March 15th, 2010 12:50 am

   Those stupid people took out mortgages that had increases written into them. Likely they were paying interest only for the first year or two and then had to begin paying on the principle, which made the payment increase.

   They knew when they signed that the payments would increase in time, they signed anyway. And now we’re expected to bail them out. I refinanced my mortgage with a fixed rate. My interest will not change, my payment will remain the same (with the exception of the possibility of escrow increasing due to insurance or tax increases).

3. s_uperdave on March 15th, 2010 1:03 am

   The ARM mortgages move by an index plus a margin. The index is what moves and made the rates go up. The are a lot of indexs out there butt the main ones are the libor, Treasury, CMT, MTA, COFI, t-bills and the prime rate. All move with differet things.

4. Christopher D on March 15th, 2010 1:52 am

   The interest rates rising didn’t cause borrowers to default.

   If you have a fixed rate mortgage the payment remains the same no matter what the market is doing hence the term “fixed”. People defaulting are usually in as situation where they have gotten a rediculously low teaser rate at the begining of the loan with a fixed rate for 1-3 years. After that the rates can increase as much as 2 percentage points per year, which adds up pretty fast.

   Another common problem is those who got into an interst only loan where they don’t have any downpayment to secure the mortgage.

   One more cause for default a situation, is people getting in at a very low rate with a balloon payment due after a certain number of years. Balloon meaning the loan gets called in, and needs to be paid in full or re-financing is required, which also costs money.

   All in all, people get into default situation because of bad decision making on their part. usually they want something they really can’t afford, and the banks have plenty of options to get an experienced investor the money. However these finance options aren’t for everyone

5. glenn on March 15th, 2010 2:12 am

   I think you are asking who determines the interest rate for each day and each market in the United States.

   We have a free market, which means that there is no government or private organization that determines what the interest rate is.

   Now you do hear about the Federal Reserve setting interest rates. They loan money to banks and they are setting the rates that they will loan money to banks over a very short term (maybe on a day by day basis).

   The mortgage market is set by competition. Mortgage companies would love to charge very high rates but there are several other mortgage companies that will under price them and so the actual rate is pretty uniform if the loan terms are the same. In other words competition keeps the mortgage rates pretty low.

   The rates have to be high enough to attract investors willing to provide money to fund the loans. Those investors could invest their money in the stock market, or US bonds or several other things.

   So the free market determines the mortgage interest rates.

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