Many consumers regard mortgage rates as moving targets, apparently governed by the whim of some ephemeral, capricious entity. People often feel confused and helpless by whatever rates mortgage lenders toss their way. Seemingly mysterious changes in rates can have a positive or negative affect on consumers and prospective real estate investors depending on investor purchasing and goals. In turn, consumer reaction to various economic forces can further fuel factors that cause mortgage rates to change.
Consumers read about economic factors that cause mortgage rates to change ranging from the Federal Reserve Board chairman announcing a quarter percent raise in interest banks charge for loaning their money to other banks to the current national debt figure tied to the GDP, PPI, and CPI or some other gobbledygook. But how does this relate to real estate? Oftentimes in real estate, perception is reality. Contrary to vox populi, the opinion of the people, the Federal Reserve Board Chairman does not directly influence the behavior of mortgage rates.
And why aren’t mortgage rates more stable? What causes mortgage rates to change, sometimes up, sometimes down? There is no secret formula to account for mortgage rate behavior. In fact, it’s really quite simple. Oftentimes, like the stock market, mortgage rates are dictated by investor emotion and by mass media force-feeding. Newspaper and television junk food is often served and gobbled up by consumers too lazy to do the research themselves. That means investigating and perusing other sources of information like contacting reputable real estate and mortgage banking professionals, and weighing what they say against your research done on the Internet or local library or bookstore. Educate yourself first.
It’s not unusual for mortgage rates or loan percentage points to change more than once per day. For example, a mortgage loan that has no points in the morning may inflate to a quarter point or .25 percent fee on the loan by the afternoon. Think of mortgage loan points as a variable service fee attached to the loan, depending on the current cost of money.
The real economic factors that cause mortgage rates to fluctuate include disparate economic reports on stock and bond behavior in the stock market, the amount of buyers to sellers that affects the movement of money in and out of the stock market, unemployment percentages, inflation fears, and to a lesser extent, economic data that reflect the strength of the economy in reporting GDP, CPI, PPI, and so on.
Gauging what causes mortgage rates to change means identifying and defining those factors that affect interest rates in a timely manner. For example, a general rule of practice is to pay attention to economic data. If the data shows hesitancy and confusion, mortgage rates may fall. Conversely, if the data shows strength and low unemployment, rates may rise. Again, a critical element in determining mortgage rate behavior is to be proactive in paying attention to the various aforementioned economic indicators and acting quickly instead of finding out MSNBC, which is oftentimes to late.
In summary, what effects mortgage rates are factors that are highly subjective, but when these factors are taken together, they not only influence the buying habits of the prospective real estate investor but the overall consumer as well.
Ask the right questions. Your economic vigilance will pay dividends in the future.
Mortgage interest rates are based on Mortgage Backed Securities (MBS) or bonds. If the bonds sell for a high then mortgage interest rates go down. If bonds sell low then mortgage interest rates go up. The answer is pretty simple.
Bonds are affected by many economic forces that influence the demand for bonds. Each week the Fed releases various economic reports that affect bond movement. Foreign markets also can affect the bond market which in return will affect mortgage interest rates. For example, when the Euro Central Bank and Central Bank of New Zealand hiked up their version of the discount rate, many investors sold off their bonds looking for a higher rate of return in their investment. Japan and China hold a good amount of our bonds, so if they decided to sell them to diversify their portfolio that could really affect the bond market and affect mortgage interest rates in a negative way.
I hope you find this information useful as you try to understand mortgage interest rate movement.
What drives changes in mortgage rates is a question that very few consumers know the answer too. There are many indirect external forces that drive the markets – stock and bond – that will have an impact on the securities that determine mortgage rates for both fannie mae and fha. Mortgage rates are not “set” by fannie mae or fha, nor are they “set” by banks, lenders, or brokers. These rates can and do change daily relative to the MBS market as briefly described below.
Fannie Mae mortgage Rates are determined by pricing and yields on Fannie Mae Mortgage Backed Securities. Simply put these are bond issues backed by Fannie Mae Mortgages.
There are various Fannie Mae Mortgage Backed Security coupons being traded daily and they are 4.0 coupon, 4.5 coupon, 5.0 coupon, 5.5 coupon, and the 6.0 coupon. These investments are traded just like regular stocks and bonds on Wall Street. The buying and selling of these Mortgage Backed Securities will determine how secondary pricing departments will determine current daily pricing which will determine available fannie mae mortgage interest rates.
When traders start buying up Fannie Mae Mortgage Backed Securities the price increases and the yield decreases. This will typically spur the secondary pricing departments at various lenders across the county to increase the pricing at a particular rate, or improve rates. The actions they take depends on the net price increases on the underlying Fannie Mae Mortgage Backed Securities at a particular coupon rate.
The opposite is also true when traders start selling off Fannie Mae Mortgage Backed Securities forcing secondary to decrease pricing on delivery of a particular Fannie Mae Mortgage Rate, or increase Fannie Mae Mortgage Rates. Again, their actions depend on the net price decreases on the underlying Fannie Mae Mortgage Backed Securities at a particular coupon rate.
Current Pricing on the Fannie Mae Mortgage Backed Securities has been increasing as demand for 4.5 and 5.0 coupons have been increasing. This has pushed yields on Fannie Mae Mortgage Backed Securities lower, as well as Fannie Mae Mortgage Rates down once again as of 02/09/2010.