What really determines mortgage interest rates?

    Stephen Boyd, Sr. Mortgage Consultant - Spokane WA
    Stephen Boyd, Sr. Mortgage Consultant

    When asking what drives mortgage interest rates and what are they based on, the correct answer is Mortgage Backed Securities (MBS’s) or Mortgage Bonds, NOT the 10-year Treasury Note as many people believe. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.  Let’s take a closer look at this.

    Mortgage Backed Securities (MBS’s) are bonds that represent cash flows from large pools of mortgage loans, mostly residential, and are issued by the three government agencies; Ginnie Mae, Fannie Mae, and Freddie Mac.  Like stocks, MBS’s are traded actively in the market, day-to-day.  The value of these mortgage bonds has a direct and inverse relationship with mortgage interest rates.  The more money investors (or the government) allocate towards purchasing mortgage bonds, the greater the bond’s value, and the lesser it costs to borrow money on a mortgage, hence lower mortgage interest rates.  The opposite also holds true; a decrease in investor appetite for mortgage bonds, the value of the bond drops, and mortgage interest rates then increase.
    So, now knowing this relationship, the next variable we want to consider is what encourages investors to purchase more MBS’s, and vice versa.  That would be extremely helpful in deciding when to lock in an interest rate, right?  First, bonds are typically considered a safe haven for investors when the economy is depressed and inflation is low…like, right now!  Investors love bonds during recessionary periods, which is why mortgage interest rates are currently at historically low levels.  Bad news or negative projections in the economy typically results in investors pulling more money out of stocks and investing that money into bonds, some of which are mortgage bonds.  As the value of the bonds go up, rates go down.  We can use this knowledge in making educated predictions on where mortgage interest rates will trend, in the short term of course, day-to-day. For example, if unemployment numbers show a decrease compared to what was last reported and consumer confidence levels are reported to be up, there will most likely be a decreased demand in mortgage bonds and mortgage interest rates will rise.  Of course, this is just one of many economic reports and indicators that we look at.  On some days there may be half a dozen relevant reports that come out, analyst predictions, and treasury announcements that will swing investors one direction or another, and then swing rates.  And also, there are many other variables that investors consider within the MBS’s themselves, that include the overall interest rate risk, prepayment risk, credit risk, and default risk which determines their appetite as well for MBS’s.
    Another great question I’ve had several clients ask me in the past as well is “when Bernanke and the Federal Reserve change rates, what does this mean… and what impact does this have on mortgage rates?”  The answer may surprise you.  When the Fed makes a move, they can change a rate called the Federal Funds Rate or Discount Rate.  These are both very short-term rates that impact credit cards, Home Equity Lines of Credit, auto loans and the like.  On the day of the Fed move however, Mortgage rates most often will actually move in the opposite direction as the Fed change.  This is due to the dynamics within the financial markets in response to inflation.
    As you can see there are many variables that determine mortgage interest rates, and we’ve just touched on the major ones.  My advice: DO NOT work with a lender who has their eyes on the wrong indicators.  DO work with a professional and knowledgeable lender who will keep your best interest in mind and who will take the time to follow the market closely and accurately, and educate you throughout the process.
    What is the next economic report or event that could cause an interest rate movement?  How are mortgage bonds trading right now, in real-time, and where are they projected to be heading?  A professional lender will have this at their fingertips.  I can provide you with an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate.  I also have access to real-time mortgage bond trading, and can use this to help warn you in advance of a costly intra-day rate change for the worse.
    Please don’t hesitate to call me if you are considering purchasing or refinancing a home, or simply have questions regarding home financing.  I am glad to be of service.

    Sr. Loan Officer

    AmericanWest Bank 

    Home Loan Division

    509-434-3835 Direct

    509-280-6484 Cell

    509-444-4642 Fax

    NMLS #487418

    sboyd2@awbank.net

     


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