What causes mortgage interest
rates to go up and down? The answer to this question is not
always simple, and can change depending on who you talk to.
But there are certain factors that affect interest rates and
drive them in different directions.
Some people mistakenly believe that the 30-year Treasury has
an effect on the rise and fall of interest rates, but most
experts do not consider this to be true. They may sometimes
be linked coincidentally, but in the end, mortgages aren't
connected to 30-year bonds.
They are not linked because mortgages, especially in today's
financial climate, are short-lived when compared to Treasury
Bonds, which last 30 years. A better indication of where
interest rates are going is the 10-year Treasury Note, due
to its shorter lifespan, although this still isn't the most
significant factor at play in the case of interest rates.
Federal rates do affect interest rates, but not in the way
you might suspect. The rates will move up or down depending
on what the experts anticipate the Feds will do – they don't
necessarily change according to what actually occurs.
So if everyone expects the rates to go down, lenders price
mortgage rates accordingly. If it seems no more rate cuts
are on the horizon because the economy is doing well, it's
more than likely that mortgage rates will rise.
Often homeowners expect a drop in rates by the Feds to
directly correlate to a drop in mortgage rates.
Unfortunately, this is not always the case. The Federal
Reserve only cuts the Federal Funds Rate or the Discount
Rate, which is short-term, especially in the eyes of the
banks. Lending institutions don't adjust fixed-rate
mortgages depending on the rate banks charge one another to
borrow money, which is exactly what the Federal Reserve Rate
reflects.
Banks use this rate to borrow money from each other
overnight, so each institution can meet its reserve by the
end of the day. They must have more cash on hand than they
have out in outstanding loans, and borrow to make up the
difference. The rate at which the banks borrow in this
process is what the Federal Reserve cuts when you hear these
announcements – it has nothing to do with mortgage rates.
These rates may indicate where the market is going in the
next while, but don't affect mortgage rates directly or on
the spot.
Instead, mortgage rates are tied to mortgage-backed
securities, such as Fannie Maes and Ginny Maes. Lenders pay
close attentions to these figures and price their mortgages
with them in mind. Market position and loan stimulus also
affect mortgages. |
