What moves mortgage rates?

  • The movement of the 10-year Treasury bond yield is one of the best indicators to determine mortgage rates movement.
  • Most mortgages are 30-year loans. However, the average mortgage is paid off or refinanced within ten years, so the 10-year bond is a great indicator to measure interest rate change.
  • Treasuries are also backed by the “full faith and credit” of the United States, making them the benchmark for many other bonds as well.
  •  However, treasuries are 100% guaranteed to be paid back, in the other hand mortgage-backed securities are not, because of payment defaults or early repayment, and thus carry more risk and must be priced higher to compensate for the risks.

Bonds vs. Rates

  • Typically, when bond rates (the bond yield) go up, interest rates go up as well and vice versa.
  • When the economic outlook is poor, investors buy bonds because is a safe investment. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. 
  • Conversely, when the economy is predicted to do favorably, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.
  • The 10-year bond yields up, mortgage rates up.
  • 10-year bond yield down, mortgage rates down.
  • Don’t mistake this with bond prices, which have an inverse relationship with interest rates.
  • An excellent way to predict which way mortgage rates are headed is to look at the 10-year bond yield. You can find it on finance websites alongside other stock tickers, or in the newspaper. 


Economic activity impacts mortgage rates.

  • Mortgage rates are very susceptible to economic activity, just like Treasuries and other bonds.
  • Jobs reports, Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on the economic calendar can move mortgage rates notably.
  • Usually, bad economic news bears lower mortgage rates, and good economic news influences a higher rate.
  • Bad economic news influences investors to sell stocks and buy bonds, conveying lower yields and interest rates.
  • When the stock market rises, mortgage rates will possibly rise too, since both hikes on positive economic news.

The Federal Reserve and Mortgage Rates “The Fed”

  • Depending on what the Fed report indicates about the economy, the Fed minutes or the change in the federal fund's rate, mortgage rates can swing up or down.
  • A growing economy leads to higher mortgage rates. In contrast, a slowing economy leads to lower mortgage rates.
  • Inflation also impacts mortgage rates. If the fears of inflation are strong, the interest rates will rise to curb the money supply, but in times when there is little risk of inflation, mortgage rates will most likely go down.


 Freddie Mac’s Weekly Mortgage Rate Survey

  • Since 1971, Freddie Mac has conducted a weekly survey of mortgage rates. The averages of the collected rates are gathered from banks throughout the nation.
  • The loans utilized for the survey are conventional loans (non-government back loans such as FHA). The survey compares conforming mortgages with a balance of 80% and the average rates are based on interest rates offered to Grade A borrowers, it is the best-case-pricing.
  • The 30-year fixed mortgage rates are the most expensive, because the 30-year fixed rate does not change, and it’s offered for three decades the premium paid is for the stability and lack of risk.
  • The 15-year fixed mortgage rates are significantly cheaper, but the payments are larger since it is paid in half the time.
  • 20-year mortgage rates are usually between the 30-year and 15-year. For instant, a quarter percent (0.25%) below the 30-year fixed. The shorter term means significant savings interest.
  • Adjustable Rate Mortgages are discounted at the outset. These mortgages are fixed for a limited period before the interest rate becomes adjustable.
  •  Use these average rates as a starting point when shopping for a loan. Take into consideration your specific situation. When a loan has a higher loan to balance (low down payment) or a lower credit score, the result will be a higher interest rate.

 

 Interest Rates Advertised

  • The mortgage rates advertised on TV, Radio, internet ads, and periodicals do not take in consideration individual circumstances or fees that could drive your actual interest up or down considerably.
  •  Borrowers considered riskier by lenders will have a much higher Mortgage interest rate. To illustrate, a low credit score usually below 620 points combined with a small down payment can lead to a higher rate.
  •  In contrast, borrowers with stellar credit usually 720+ points and plenty of assets will get the lowest interest rates available.
  •  Mortgage rates can adjust by paying mortgage points. Depending on how many points the borrower pays. The borrower will need to consider whether the cost may or may not equate to a significant saving on the monthly mortgage payments.
  •  Rates can vary based on how much lender charges to originate a loan. The final rate will be affected by both the borrower economic circumstances and the lender a person selects, despite what the going rate happens to be.


Additional Factors that Influence Mortgage Rates.

  • Supply, if loan originations climb sharply in any given period, the supply of mortgage-backed securities (MBS) will not be able to keep up with the demand. The prices for the MBS will need to drop to attract more buyers. This means the yield will rise, thus pushing mortgage rates higher.
  • In the other hand, if there a lot of demand, for instant, the Fed is buying a lot of the mortgage-backed securities. The price will go up, and the yield will drop, thus pushing rates lower.
  • In other words, if lenders can sell their mortgages for more money, they can offer a lower interest rate. The Fed buys the MBS to drive mortgage rates lower, and ideally keep home prices stable, by enticing more would-be homebuyers into the market.
  • Timing, bond prices are volatile prices may plummet in the morning, and then rise by the afternoon.
  • Mortgage rates may remain unaffected by the bond pricing because the news won’t make it down to the capital markets, or takes more time to do so. Nevertheless, lenders are typically cautious about lowering rates, but quick to raise them. Good news can take a while to move rates, whereas bad news can have an immediate impact.
Mortgage and Real Estate News

Arturo Rubio
Real Estate & Mortgage Professional