There are many factors that determine mortgage rates and the lender is only partly responsible for the interest rate that you will be charged for your home mortgage. In a free economy, mortgage rates are dictated by the market, which is made up of investors who purchase and sell what are known as mortgage-backed securities (MBS).
One factor that affects the mortgage rate is the inflation rate because investors naturally demand more interest when they expect the value of their money to decline in the near future. Another factor is the risk of a default. When there is a higher chance that borrowers may default on their payments, the mortgage rate will also be higher. Another important factor is the maturity or term of the investment. The longer the duration in which the money will be tied up, the higher the interest rate will be.
In general, investments in mortgage are put together in large groups or pools that tend to have similar loan features and interest rates. Thus, your mortgage will actually become a part of an MBS, which may gain or lose in value depending on economic conditions.
When a particular pool of MBS changes in value, it will also cause a modification in the interest rates that lenders offer you when you want to buy or refinance a home. The relationship between the different factors and the mortgage is quite complicated and is also dependent on investor confidence. To simplify matters, the mortgage rate that is offered to a person who wants to purchase a home or who wants to refinance will tend to be lower when the prices of MBS securities increase.
During those times when the economy is uncertain, predicting the mortgage rate is very difficult because of the various factors that come into play. For example, if the number of homeowners who want to refinance their loans increases, this causes a significant change in investor behavior because their expected cash flows will be drastically reduced when the number of refinances is high.
Investors tend to shift some of their investments to mortgages with lower interest rates. Depending on how volatile the situation is, the mortgage rates being offered to homeowners will also fluctuate.
However, lenders do have some input on the rate that is offered to you when you want to buy a home or refinance it. While the basic price is dependent on market conditions and investor behavior, the lender also adjusts the rate depending on the borrower.
What this means is that a borrower with a lower credit score will be offered a higher mortgage rate compared to a borrower with a higher credit score. This is natural because the lender would like to compensate for the higher risk that he would be taking with the borrower who has a lower credit score.
Because all of these are quite complicated, what the borrower could do is to shop around to get familiar with the different mortgage rates and terms being offered. He should also try to inform himself of the average national rate to have a benchmark to determine if the rate being offered is reasonable.