Bounty: how do mortgage rates work?

in steem-bounty •  last month 

I am trying to understand why mortgage rates are so expensive in the US and more broadly what goes into the mortgage rate in the end.

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While the FED Funds rate is around 2% and long- and short-term bonds are around 2% as well, I don’t understand why a bank has to make mortgages around 4%, or twice as high.

So I am looking for the mechanics of how morgate rates are determined by banks.

If you can explain to me how this works or provide a link that properly explains this you will earn the bounty.

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Only 4%? Banks can do whatever they like, same if it comes to tax.

It different by bank and country and also greed 😁. An opportunity for the financial institution to milk you dry for giving you a house or something.

https://www.thetruthaboutmortgage.com/what-causes-mortgage-interest-rates-to-move/

The treasury bill and some other higher power factor also comes to play.

Interesting question. The FED fund rate is the rate charged between bank to bank lending whereas the mortgage rate is an agreement between bank and citizen. This would lead me to believe that banks give each other better rates than individual citizens.
The FED fund also determines their lending rate every 45 days or so, so % moves more actively than the housing mortgage rate.
Because banks usually have much more collateral they are likely privy to lower rates than indivdual consumers, this would be my best guess, but I must admit it is a guess. Investopedia has good articles for anything to do with money, I'll link one on how the FED rate works. Hope this helps
https://www.investopedia.com/terms/f/federalfundsrate.asp

  ·  last month (edited)

Thank you so much. I have a lot of guesses too, but this is about understanding the actual mechanics.

  ·  last month (edited)

Risk vs reward. What's yout credit score, income and job stability like? This link explains https://www.discover.com/online-banking/banking-topics/how-the-federal-reserve-affects-mortgage-rates/

People foreclose, bond always pay, hence higher rate than bond.

That does not explain 2x difference. Imho or why the difference in other countries is much smaller

other countries still make 3-4% extra compared to thr saving rate. In US, rates are so low that operating margin seems higher in % but not in $ amount.

I don't think this is accurate. I think US is one of the highest interest rates of all the western countries .

But I am not here to argue about that. Just wan't to understand how these rates come about.

I found this link that talks about Fannie Mae and Freddie Mac and how these secondary markets effect the prices that banks charge.
https://www.bankrate.com/finance/mortgages/how-lenders-set-rates.aspx

I feel this is more the perspective of the end consumer, I am more worried about the economic mechanics

Sorry mate I can only help with mortgages in the UK to be honest mortgage advisors are normally cost effective hope you get sorted

Posted using Partiko Android

I think this is an unfair robbery. The state should protect individuals and reduce credit rates for their well-being. Every citizen should have a home in which he can sleep safely.

Mortgages are a new development in Ghana and I don't really understand them as at now

@knircky, I don't know the all Mechanism but in my opinion Banks push people towards the Debt Trap.

Sure, but that is a different story and not relevant here.

That's true, just wanted to speak my mind. Enjoy your time ahead.

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I don't think I can help you this time.

But, I´m happy to see that @steem-bounty is back in business! :D

thank you very much! That is ok, we can't all know everything!

Ye, unfortunately not!

Mortgage rates follow more the longer side of the yield curve (10 years) as that is the average duration (not maturity) of mortgages. That is why the talk of curve inversion is such a problem for banks as they take deposits paying near fed funds to lend out for mortgages. However, banks have found ways to shield themselves from this margin compression by finding ways to include services and fees to make it more expensive to finance a mortgage which in return make it worth marketing so many refinancing when rates drop.

Posted using Partiko iOS

but the yield curve is at 2% and mortgage rates are kinda double that. In EU the rates are much closer together no?

Yes indeed. So the yield is based on US Treasuries which are considered “risk free” so any type of debt created privately should have a “surcharge” on top of that rate whichbis called a spread. The spread reflects the relative risk to the US Treasury. Thus, an individual has a larger probability based on historical default rates to not pay and thus a higher interest rate.

Rates between geography also fluctuates with inflation and currency values which is a bit more complicated. For mortgages, the US has a very liquid and large secondary market where investors allocate capital to capture marginal higher returns which make it even more competitive and in theory reduce the spread.

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I found this site very insightful and also relatable as i am U.S resident and i can agree that mortgage is a *****
https://www.consumerfinance.gov/about-us/blog/7-factors-determine-your-mortgage-interest-rate/

The answer is simple:
The bank wants to make as much profit as possible.
Some banks hope that the customers are uninformed and try to get the consumer to sign a high mortage rate.
Other banks will charge lower rates to get more consumers, but they will always be more expensive then FED, because lending to a citizen involves always a risk for the bank to loose the money and they will try to overcompensate for that risk.

It's not the same in all countries. What you have to think when getting a mortgage is that it have to be at a fixed rate. Don't let 'em fuck with you.

Thats totally not the question here.

And how does it work differently in your country

Oh sorry man, my english is not perfect.

First of all, I'm from Spain.

And in Spain you pay money regularly (let's say you have got a mortgage for 30 years)
each year (for example)

In the payment you pay the amortization and the interest rate. As you pay, the money of the interest is lower but the amortization keeps the same.

Here's an example: https://blog.bankinter.com/economia/-/noticia/2016/9/16/cuadro-amortizacion-hipoteca-como-funciona

I did not see any of these posts go over PMI.

PMI is the biggest robbery of them all. If you owe more than 85% of your home value, then you are considered a high risk investor, so you are forced to pay for an extra insurance. The extra insurance protects the bank in case you stop paying your mortgage.

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