Skip to main content

Becoming The Interest Rate Expert

Understand the five main variable components of rate-sheet pricing and interest rates

Victoria DeLuce
Victoria DeLuce
Interest Rate Expert

Building a rate sheet is a pretty simple mathematical equation. How much does the company get paid for that particular loan and how much does the company have to pay out.

Five main variable components go into rate-sheet pricing and interest rates. The bond price, servicing value, lenders’ cost to manufacture, loan originator compensation, and the borrowers’ risk profile.

For this segment we will focus on the bond price. We don’t have much control over the bond price and that’s why we hedge. Hedging protects against interest rate risk, i.e. the change in bond price from the time a loan is locked to the time a loan is closed and sold on the secondary market. If a loan is locked at a 7.000% interest rate today that pays the lender 300 basis points or 3 percent, and the bond price goes down by 200 basis points by time the loan closes, the lender will only be paid 100 basis points when they sell the loan. Hedging offsets the difference of that market movement.

The agreement the lender has with the broker dealer says in the event the market worsens, the broker dealer will make the lender whole, paying them the 200 basis points change in the market. Conversely, if the market improves by 200 basis points, the lender will pay the broker dealer the difference. In this scenario, the lender would be paid 500 basis points when they sell the loan, netting the original 300 they were hoping to make. Hedging is like insurance.

Hedging is important because bond prices move every day and intraday. Which is why we see re-prices to the rate sheet from time to time. Trader speculation, economic releases, the current state of the economy, and most of all supply and demand play into fluctuating bond prices. This past year the biggest driver for interest rate or bond price movement has been inflation and how the Federal Reserve has struggled to rein it in.

Employment & Stability

The Federal Reserve, or the Fed, has two congressional mandates that date back to the 1970s: maximum employment and price stability. If we have runaway inflation, the Fed is not living up to the latter mandate. For most of 2022, inflation was running three to four times higher than what it should be. In order to regain price stability, the Fed started to increase the Fed Funds Rate. This is the rate at which banks borrow from each other overnight.

The thought process is if it costs more for banks to borrow from each other, that cost will find its way into consumer loans. If borrowers must pay more in interest, they will have less disposable income to put into the economy, hence slowing the economy and slowing inflation. On the flip side, in the event of recession bond prices would go up and interest rates would come down.

A great way to stay in the know is to follow economic releases such as the nonfarm payroll number and unemployment, which are typically released on the first Friday for each month. Consumer price index (CPI) is another hot release as of late. And, of course, follow the Fed announcements.

This article was originally published in the Mortgage Women Magazine January 2023 issue.
Victoria DeLuce
Victoria DeLuce,
Victoria DeLuce

Victoria DeLuce is the senior vice president of business development for Delmar Mortgage.

Published on
Jan 27, 2023
Working To Change The Upper Levels Of Business

Tricia Migliazzo has garnered great success at Lenders One helping others

Laura Brandao
FICO Increases 400% For Tier 3 Lenders

Finding solutions in soft pull credit reports

Chrissy Brown
Job Transition: When Is The ‘Honeymoon’ Over?

How long does the lovefest last for you or your new boss when you land the position of your dreams?

Tina Asher


Top 3 Strategies to Make 2023 a Wildly Successful Year

  In this arena, time means money. Spending hours and hours on a 20-page business plan may not be the best us...

Jan 19, 2023
Investor Confidence in Today’s Non-QM And Why Originators Are Paying Attention... A Virtual Town Hall

We host Angel Oak Mortgage Solutions for a special 2021 edition of their virtual town hall series they ran fro...

Apr 08, 2021
How to Help Real Estate Pros in a Post-Refi World

Hear from Melissa Merriman, REALTOR® with The Melissa Merriman Team at Keller Williams, on what real estate pr...

Mar 18, 2021
Judge OKs Amended Lawsuit Claiming Predatory Lending By Wells Fargo

Officials in 3 Ga. counties filed the complaint claiming Wells Fargo engaged in an 'equity stripping' scheme that targeted minorities.

Fannie Mae Transfers Credit Insurance Risk On $31.8B In Loans

CIRT 2023-2 and CIRT 2023-3 transferred a combined $926 million of mortgage credit risk to private insurers and reinsurers. 

CBC Mortgage Agency Hires Capital Markets Director

Mark Leslie has 22 years of experience as a mortgage trader.