I do not know what you think, but to me it looks like the rate of a mortgage is based on something that has nothing to do with buying a home...

The rate of a mortgage can legally vary from 0% and 33%. Now a days (June 2009), it is still under 6%. It went as low as 3% for regular people and 0% for people with low income and who are first time buyers (obviously, those are backged by the government and thus they are more difficult to consider in the whole pool.)

So... Why would I say that this is strange?

If I were a banker, I would keep my rates as high as possible, all the time. And I would make sure that people pay me back. Why is it that bankers today do not work that way anymore?

Obviously, if I am a bank and offer a loan for 10% and the bank next door offers the same loan for 9%, I'll never get customers (except those customers who don't know how to shop.)

So I will lower my rate to 9.1% and throw in a few other services... Like any other product, the rate on a loan should go lower because of competition.

Well... this is not what is driving the rate. As you certainly have heard, the federal reserve bank sets a basic rate and then banks can use that as their own index. For instance, you credit card is usually the federal reserve rate +17% to +22%.

To my point of view, that means there is very little margin for competition in the market... If in the 90's you had rates of 17%, you probably have refinanced when the rates came down. And again when they came down again. So what was the meaning of that 17% then? And what will be the meaning of a 10% rate in 3 or 4 years if everyone who refinanced or bought a home in 2009?! (for sure, you won't refinance then!)

10% is a normal rate. 12% is a good rate. 6% is very low. Anything under that is an incredible deal. 15% and over is not good at all. The reason I can say that is because I know the math. How the interests are compounded. 10% is normal. That does not mean it is a good deal for you as a buyer, but in the economy as we know it, it is the most sensical.

This is my conclusion. A stable economy will be represented by a relatively stable rate for any kind of loan.