HOW LENDERS SET THEIR RATES
Each business day, mortgage companies set rates for their customers. Lenders have what is called a “secondary department” whose job is to set rates according to market conditions while keeping competitive with other mortgage companies.
Mortgage rates are typically released around 11:00 a.m. EST each day, after the major economic reports are released. These economic reports can indicate whether an economy is slowing, growing, or remaining stable.
If a report is released showing that more people are unemployed than anticipated, then it's likely that mortgage rates will fall a bit for that day. When more people are out of work, it suggests that the economy isn't doing very well.
If economic reports are released indicating that the economy is indeed slowing or even heading into a recession, then rates will continue to fall. If the slowing trend continues over the course of a few months, then mortgage rates will see an extended decline.
If, on the contrary, reports show more people at work or more housing starts and retail sales are up, then mortgage rates will rise.
Secondary departments have to make prudent, educated decisions every day on how to price their mortgage rates. Sometimes they'll even make a rate change during the course of a business day.
There are bonds for 30-year fixed rates, for 15-year fixed rates, and so on. Though there are literally thousands of places to get a mortgage, they all index their mortgages from the very same mortgage bond.
Adjustable-rate mortgages are not tied to mortgage bonds, but to the index the adjustable rate is tied to (as mentioned in the previous section). There is one exception: loans tied to the Wall Street Journal prime rate.
The prime rate is determined by a survey of the 30 largest banks in the United States. It is the rate banks typically charge their very best customers to borrow money. The prime rate will be set at 3 percentage points above the Fed funds rate. If the Fed funds rate were at 5 percent, the prime rate would be 8 percent. This is the only condo loan type that is tied directly to the Fed. Prime rates are typically found on equity loans, not on mortgages used to buy property. We'll discuss equity loans for condos a little later in this chapter.