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A Quick Guide to Understanding Mortgage Rates




The Mortgage Market Insider

A Quick Guide to Understanding Mortgage Rates

 
Dear [fname] 

 
Mortgage rates are a very popular topic right now, as all the media channels have been reporting that rates are now at all time record lows. Understanding what determines mortgage rates is also quite simple once you understand some basic fundamentals. As clients, family and friends are all probably asking you questions like “What are rates at right now” or “Why are rates so low”, here is a quick guide that will help you answer those questions correctly.
 
 
What economic events force mortgage rates to go up or down?
 
So what causes mortgage rates to go up or down? These are tied to some fundamental economic activities that take place everyday in our markets, by understanding these you will now be able to better predict and understand what direction rates will probably move. 

Stocks and bonds compete everyday for investors dollars in the open markets, stocks pay a higher rate of return so they are more risky, bonds have a lower return so they are seen as more stable and less risky. Remember: When there is weak economic news (higher unemployment, less homes sold), this normally causes money to flow out of Stocks and into more stable Bonds, helping Bonds and home loan rates improve, while strong economic news (lower unemployment, more homes sold etc) normally has the opposite result, so investors will put their money into more risky stocks, thus causing mortgage rates to increase. It is an interesting dynamic that generally bad economic news is good for mortgage rates!  

Inflation is going to be a problem sometime in the near future because of all this money that is being printed to pay for Government spending. So how will this affect mortgage rates? The bottom line is that as inflation increases, home loan rates will rise too. That’s because lenders know that a rise in inflation actually diminishes the value of the money they receive over the life of a loan, as the money they receive for payment simply won’t go as far. So when they see changes in inflation or even anticipate a rise, they increase their interest rates to make up for the loss in future buying power that will happen as a result of inflation.  

Also, when you hear the Federal Reserve talk about possibly raising their federal funds rate, or their discount rate, this does not directly affect mortgage rates and in most cases has nothing to do with mortgage rates. The federal funds rate is what home equity lines of credit and credit cards are tied to for example.
 
The Relationship between Mortgage Bonds & 30 year Fixed Mortgage Rates 
 
Mortgage rates are traded everyday as mortgage backed securities/mortgage bonds (MBS) just like stocks. They either go up or down in price on a daily basis. Here is a picture of a MBS trading chart below. When MBS (green) are trading downwards, mortgage rates (red) will go up and when MBS are trading higher, mortgage rates will go down.
 
   
When MBS trade lower, lenders raise their rates and distribute “Reprices for the Worse” (see chart below) and republish these higher rates to the public. This daily trading of MBS directly correlates to the mortgage rates we see everyday from our lenders.

When MBS Trade Lower Mortgage Rates Increase

 

What is causing mortgage rates to be at record lows?
 
Economists largely attribute the decline in mortgage rates to the European debt crisis and new concerns about the global economy, which has unleashed a massive wave of cash into U.S. bonds from investors around the world.

Investors recently have not been convinced that the worst is behind us and instead chose to continue to allocate funds into risk-averse assets like government guaranteed U.S. Treasuries. This “flight to safety” has allowed mortgage bonds to move higher and rates to go lower. 

What is a “Flight to Safety” 

A flight to safety occurs when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. As Treasury yields fall, prices of mortgage backed-securities move higher, which allows lenders to offer lower mortgage rates. When Treasury yields rise, mortgage-backed security prices are led lower, which forces lenders to push mortgage rates higher.
 
Because of this recent flight to safety in the market,  mortgage bonds have hit new trading records recently (see chart below), this has resulted in record low interest rates. These plummeting interest rates have occured in direct proportion to the declines in the stock markets and the Euro currency for example. 

 

Where will rates go from here?  

Personally I don’t see rates moving too much higher than 
where they are currently, at least through the summertime. If you keep hearing that the Euro zone and other markets around the world are continuing to have problems, you can rest assured that this will keep money flowing into the US bond and treasury markets, thus keeping US mortgage rates low. Until many of the countries around the world address their debt issues, we could see very low mortgage rates in the US for a considerable period of time.
 
It sure is a great time for anyone who can refinance or is looking to purchase, borrowers can get 4.375% on a 30 and 20 year fixed loan, and 3.875% on a 15 year fixed. As always, if you have any questions about any of the information above, please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.
 
  

 
 

In This Issue  July 6th
  • A quick guide to understanding mortgage rates
  • What events cause rates to go up or down? 
  • Why are rates so low?
  • The future of interest rates

  

      
 

Call Michael At
(858)-200-9602
 
 
 
 
 
 
Did you know that if a consumer has a dispute on their credit, a lender cannot fund their loan. New Fannie Mae and FHA rules advise that if a client has a dispute on any account on their credit, they have to have it resolved before the loan can fund. It would be a good idea to ask any client you are working with if they have a current dispute with any creditors. Sometimes people can have disputes over small bills like a cell phone bill or a utility bill, these will have to be resolved before funding so their loan can close.
With rates being at record lows, it would be a good idea to reach out to past clients that you closed a transaction with and advise them that rates are at record lows. Perhaps they will be able to save a couple of hundred dollars a month on their payment if they are able to refinance at a lower rate. If they cannot refinance it is still a great way to reach out and show them that you care about helping them save some money, and that you will always present this opportunity in the future if the situation arises again.
 
 

Copyright 2010 Michael A. Deery  Newsletter design by Blaze Interactive

 


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