Quiz: Do you know how mortgage rates are determined?

Staff

4 Min Quiz

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About This Quiz

Are you in the market to buy a new home or refinance your current mortgage? You've probably noticed that mortgage rates seems to fluctuate significantly, but do you know how they're set? Take our quiz to see if you know the science behind the seemingly random method of determining mortgage rates.

What factors have the greatest impact on the interest rates charged for mortgage loans?

The factors that have the greatest impact on mortgage interest rates in America are inflation, the price of U.S. treasuries and the Federal Reserve. The number of variables are responsible for rate fluctuations.

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What is typically the first major financial decision a teenager makes?

A teenager must decide whether it is appropriate to apply for a student loan to help finance higher education. In most cases, a student loan is the first formal loan that a teenager will apply for at a bank.

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When you take out a mortgage, are you assuming all the risk?

The bank takes a risk on you and your long-term ability to make required payments. Because the real estate market tends to fluctuate, the bank faces a possibility that if you default on a loan, they may not be able to recover the full value of your home.

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In the U.S., what usually happens with your new mortgage after your lender gives you the loan?

In most cases, the lender will sell mortgages to a third party such as a mutual fund or an institutional investor called an aggregator.

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What does an aggregator do?

An aggregator buys mortgage loans from lenders and packages them into a mortgage-backed security (MBS), which are then divided into shares and sold to investors who earn interest based on your loan payments.

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What are shares in a mortgage-backed security called?

Shares in a mortgage-backed security are referred to as tranches. These tranches are sold to investors and function similarly to bonds.

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When comparing rate of return, what U.S. treasuries item does an investor compare to the interest rate on a 30-year fixed mortgage?

It seems logical that a 30-year mortgage should be compared to a 30-year treasuries bond, but that's not the case. Since many 30-year mortgages are refinanced or moved after 10 years, investors compare them to 10-year bond rates.

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What happens to mortgage interest rates when economists predict a rise in inflation?

When inflation increases, money borrowed is worth less when people pay it back. Inflation is a big problem for lenders, because investors demand higher interest rates to make up for expected inflationary losses.

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How does the Federal Reserve influence the federal funds rate charged by banks for overnight loans?

Overnight loans are loans from one bank to another for the bank to meet end-of-day asset requirements. The Federal Reserve influences the federal funds rate charged for overnight loans by selling or purchasing securities. These securities consist primarily of government bonds, foreign currencies and gold.

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