Setting the Rate

The current mortgage rate your bank charges you is determined through a wide variety of factors. It is based on the rates set by the Federal Reserve Board, which is in turn influenced by the economy in general, and factors that include the Consumer Price Index, Gross Domestic Product, and Employment Cost Index. These economic indicators tell us whether the economy is strong or weak. In a strong economy, the current mortgage interest rate will be high; and in a slow economy, it will be low.

Although the Federal Reserve Board sets the stage by deciding the Federal Funds Rate, a rate from which all mortgage rates are derived, there is no single, uniform, current mortgage rate. Although the rates will not vary widely, it is not at all unusual for banks, even in the same town, to offer rates that vary by several basis points.

Lenders in different parts of the country will offer rates that vary by even greater amounts, because the local economies will influence the rate. For example, if the national economy is in great shape, but a particular region is going through a period of economic doldrums, banks in that region are likely to offer rates that are lower than the national average, because demand for mortgages will be lower wherever hardship is occurring.

Of course, the rate offered each individual will vary a great deal, depending on their credit rating. When a bank offers a current mortgage rate of say, six percent, this not necessarily their best rates, but rather the bank’s best rate offered to customers with the best credit. Someone with poor credit may end up paying two or three times the current mortgage rate for a home loan.