When they set out to buy a home, most people have to take out a mortgage loan. But the interest rates they must pay for that loan are determined by a number of factors. Most home buyers or those looking to refinance their homes watch the news and scour the Internet in search of information about mortgage rates. However, while mortgage rate trends certainly have a large impact on the mortgage rates that individual home buyers will pay, an individual's financial record also affects the mortgage rate that he or she will pay.

Mortgage Rates and the Secondary Market

Most loan originators sell the loans they grant into the secondary market. This way, the bank or mortgage company still makes money from the loan but does not have to worry about the financial toll that would come with default or foreclosure. In the secondary market, large investors like Fannie Mae and Freddie Mac purchase the mortgages, hoping to make a profit on the interest paid. The market helps to determine mortgage rates; when investors are buying mortgage securities, then rates tend to be high. But when investors back off, mortgage securities don't sell well, and rates tend to be low. Foreclosures affect mortgage rates because when large numbers of people are foreclosing on their homes, investors are less likely to purchase mortgage securities, causing rates to increase.

The secondary market also influences interest rates because investors in the secondary market tend to set limits on the amounts of the mortgages they will accept. Loans that are outside of those limits will come at higher risk to mortgage companies, so they will generally have higher mortgage rates.

Mortgage Rates and Individual Financial Health

An individual's mortgage rate is also greatly determined by his or her financial health. The higher a person's credit score, the lower their mortgage rate. Mortgage companies generally see people with higher credit scores as less likely to default than someone with a low score. Longer-term mortgages are also seen as more risky for mortgage companies, so home buyers usually get higher interest rates on longer-term loans.

Variable and Fixed Rate Mortgages

Home buyers who choose variable rate mortgages will have much different rates than those with fixed rate mortgages. Those with variable rate mortgages have lower rates to begin with, but those rates can fluctuate and become higher with market trends. Fixed rate mortgages usually start our higher but are guaranteed throughout the life of the mortgage.

Although mortgage rate trends certainly affect home buyers' mortgage rates, they are not the only factors. A person's individual financial health also has a significant impact on the mortgage rate that individual will pay.