Have you ever wondered who or what determines mortgage rate fluctuations? To most people, mortgage rates move without explanation. In fact, the authority behind mortgage rate fluctuations may surprise you. Whether you are buying a home for the first time or you are interested in refinancing an existing mortgage, the true force behind the interest rate is not determined by the lenders offering them. Rather, the actual force of mortgage rate fluctuations is indicated by investors in the secondary market.

Here is how it works…The mortgage lender that initiates, approves, and finances your loan is called the originator. A loan originator is not a person, but rather a type of financial institution such as a bank or credit union. On the date of closing, a simple exchange of money occurs; the funds are allocated to you from a financial institution and you then give that money to the seller of the home for purchase.

But wait, this is what you may not know…Once the loan is funded, the financial institution, also known as the originator, makes a decision to either keep the loan in its portfolio or to sell it on the secondary market. If the loan remains intact, it accrues money in the interest you pay each month. Conversely, if the loan is sold, the funds must be replenished by the originator so additional loans can be financed to other homebuyers. Secondary market investors are critical to the process because they distribute funds so financial institutions never run out of money for new mortgages.

Who are secondary market investors? They are comprised of insurance companies, pension funds, securities dealers, and government-chartered companies. All of these secondary market investors can purchase mortgages and can also assemble mortgages together for resale in what is termed mortgage-backed securities. Mortgage-backed securities are liquid investments that can be easily bought and sold.

How does the secondary market affect you as a home buyer? The condition of the economy is an important indication of mortgage rate fluctuations. In other words, investors want to earn the best return possible. When the economy is booming, future earnings are expected to be better than current ones. As a result, investors will wait purchase until higher earnings occur. In this way, lenders cannot sell their loans at lower yields and mortgage rates go up. Alternatively, when the economy is in a slump, investors buy as much as possible as to avoid declining yields later. When this happens, mortgage rates go down. Therefore, locking in the best interest rate possible could be in a period of economic downturn. The key to obtaining the best mortgage rate is to stay focused and be informed about market trends.