What Determines Mortgage Interest Rates?
Overview Mortgage interest rates are largely determined by the lender’s expectation of inflation. This is a long-term expectation, subject to such variables as governmental attitude toward fighting inflation. Other variables affecting mortgage interest rates include local default rates and homeowner credit worthiness to the demand in the secondary mortgage market. The Average Term of a Mortgage The average length of time a mortgage exists before it is paid off, e.g. upon refinancing or when the house is sold, is about 10 years, even though the mortgage payment schedule is usually amortized out to 30 years. This makes mortgage interest rates more comparable to 10-year bonds than to short-term investments. For this reason, the 10-year Treasury note tracks with the average mortgage rate, differing by about 1.5 percent to 2 percent. The difference is accountable to the risk of homeowner default, for which mortgages have to compensate investors.
