Mortgage Rates

The mortgage rates a prospective homebuyer encounters when he or she ventures out into the real estate market can determine the size of the purchase and therefore the quality of home a family may be enjoying for many years to come.

Given the key role interest rates play in our lives, it is no wonder that many of us strive to come to a better understanding of interest rates and the main forces determining their up and down movement.

In the most basic view, today’s interest rates are the product of the market’s best guesses as to how much demand there will be in the short and longer-term future for the goods and services available in the local economy. Whether we’re talking about homes, food, transportation or any of the thousands of other things necessary to living the modern American lifestyle. Anything for which monetary value is, in fact, attached. Terms like supply and demand, labor rates, capital markets, inflation, recession etc all must figure into any knowledgeable discussion of interest rates. But what’s key is an understanding that the amount of extra money available for lending is seldom in complete balance with demand-and the number of consumers vying for it. Also to be considered is whether or to what degree the supply-demand situation is likely to change over time.

While the above basics hold true for the mortgage loan market, mortgage lenders additionally determine a maximum mortgage amount and applicable interest rate for individual borrowers based on that person’s personal credit history and financial situation. They may also consider the value and location of the property to be purchased along with other factors such as down payment amount and length of the loan period in arriving at a specific interest rate.

Along with all this mortgage grantors also charge borrowers “origination points” on each mortgage loan, typically amounting to between 0.7 and 1.0 points. Even though origination points affect the final rate decided on for borrowers, the other factors discussed above, along with secondary capital market demand, do have much more an effect on the going market mortgage rates.

What is secondary capital market demand? Individual mortgages are usually rolled into investment vehicles called mortgage-backed securities (MBSs) for sale to investors and institutions looking for sources of interest income superior to that offered by bank deposits. Traditionally this has served to make much more money available to borrowers as lending institutions recycle the funds received for the individual mortgages passed on to entities such as Fannie Mae and Freddie Mac, which underwrite MBSs. Troubles with the quality of some of the mortgages included in MBSs have recently led to liquidity problems, as investors shunned the tainted instruments. But the federal government has been active in remedying, through regulatory and fiscal policies, the resulting lack of MBS market demand. As mortgage backed securities once again recover their place in investment portfolios, the subsequent increase in available funds should help keep mortgage interest rates low.

The bond market also provides clues as to the future of mortgage interest rates. As bond yields rise or fall so do the rates for mortgages-as both represent the cost of borrowing money on the open market. A small change of a few “basis” points (1/100th of a percentage point) in bond yields can translate into thousands of dollars in losses or savings for new borrowers over the life of their mortgage loan. By the same token, any rise or fall in existing bond values reflects a market adjustment for each bond’s locked-in interest rate in a changing interest environment. A bond paying higher interest instantly becomes more valuable when interest rates drop-as bonds issued from that point on will offer the lower interest rate prevailing. A five percent bond is worth more when all others are only paying four percent. At times, mortgage interest rates will exaggerate somewhat such swings in the bond market, especially in the case of longer-term mortgages.

Inflation is yet another factor affecting mortgage rates, as is the Federal Reserve’s reaction to that inflation. When the price nationwide of goods and services is deemed by the Fed to be moving up or down too rapidly, the Fed will increase or decrease the supply of money to compensate. This has the effect of countering and putting pressure on overall prices to cease their unfavorable movement. One way the Fed does this is by requiring banks to keep either more or less of our deposited money on reserve rather than lending it out. This affects the supply of money available on the market for mortgage purposes-and therefore the interest cost to borrowers.

Assimilating all this may seem daunting for the average family looking for a mortgage to finance a hoped for new home. And yet it’s something our credit experts are skilled in analyzing when advising you of the options best suited to your personal situation.

If you’re serious about addressing your financial needs the most prudent way-the way which will place your future on the soundest possible footing-call and ask to speak with one of our credit experts today.

We’ll be happy to help you, too, chart a better financial course.



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