FAQ |

# How do MBS prices relate to mortgage interest rates? Sorry, I'm a newbie.

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For example, if the price for FNMA-30 3.0 is at 104.03, what does that mean for my ability to get an interest rate of 3.0. Do rises in MBS prices generally mean a rise or fall in available mortgage interest rates?

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Jess,

When MBS prices rise interest rates decrease. When MBS prices fall interest rates increase. The yield (interest rate) is inversely related to the price.

A very rough rule of thumb is that every increase or decrease of 1%, or one point, equals a change of 0.25% in the mortgage rate. The MBS price that you reference above of 104.03 is equal to 104.03%. The value of a loan put into an MBS at 104 is 104% of the face value. So if a lender puts a \$100,000 loan into a security at 104 they receive \$104,000. If the price goes down to 103 a lender must charge 1 point to get the same amount of revenue or increase the yield (the interest rate) by about 0.25%. I.e., a consumer that hasn’t locked in a rate might have to pay an additional 1% in points or closing costs or accept a 0.25% higher rate if the MBS goes from 104 to 103.

This explanation is very oversimplified though. It would take writing a book to adequately address how the mortgage securities market works. For example, the coupon rate (3.0% in the example above) is the rate of return the investor in the MBS receives. It doesn’t include the guarantee fee or the servicing premium. 3.0% is not the interest rate that a consumer pays. That rate is about a half a percent higher than the coupon rate.

While the price of the FNMA-30 3.0% coupon doesn’t give you specific information about the ability to acquire or the costs of a 3.0% mortgage since the 3% coupon more closely corresponds to a 3.5% mortgage rate, you can get an idea of whether rates are increasing or decreasing by watching MBS prices.

7 months ago Jess Bardin said: