Mike Fratantoni is chief economist with the Mortgage Bankers Association, a real estate finance industry advocate. In an interview, Fratantoni explained that mortgage interest rate fluctuations are closely related to the level of risk perceived in mortgage-backed securities, which is the instrument investors use to trade blocks of mortgages in capital markets, where the interest rates are ultimately set.
Compared with other types of investments, “an investor in a mortgage-backed security has a lot of uncertainty,” Fratantoni said. “If a borrower refinances that loan [or] if they sell their home, the investor gets the money back earlier, and if rates rise, the investor gets their principal back later.”
Relatedly, mortgage interest rates rose dramatically in the 70s and 80s, reaching their all time peak of 18.5% in October of 1981, largely due to the pace of inflation. At that time, the high mortgage rate was one way to compensate investors for the high inflation rate. Today, inflation is running between 1.5% and 2% — very low levels historically. “That’s one of the main factors leading to low long-term interest rates,” Fratantoni noted.
In an email with 24/7 Wall St., Daren Blomquist, senior vice president with property and real estate data company ATTOM Data Solutions, emphasized the myriad of factors that go into assessing the risk of making a home loan. The complexity of the assessment has increased after stricter underwriting standards were implemented following the subprime mortgage crisis.
Another key factor is whether you will be living in the home. “Investor loans will inherently come with a higher rate than owner-occupied loans because they are higher risk given that the owner is not using the home as shelter,” said Blomquist.
To understand how mortgage interest rates might increase, 24/7 Wall St. reviewed historical mortgage rate fluctuations since the 1970s and government housing market reports. We also consulted experts from the Mortgage Bankers Association and real estate company ATTOM Data Solutions.