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What’s Ahead For Mortgage Rates This Week – May 9, 2016

May 9, 2016 by · Leave a Comment 

Closing Paperwork: How to Read and Understand the Truth-in-Lending Disclosure Statement

Mortgage rates fell across the board last week according to Freddie Mac’s Primary Mortgage Market Survey. Other economic news included reports on construction spending, public and private sector employment and national unemployment.

Construction Spending Grows in March

The Commerce Department reported that the growth rate for construction spending fell in March to 0.30 percent/Analysts expected a reading of 0.70 percent based on February’s upwardly revised growth rate of 1.0 percent. Construction spending was propelled by a 1.50 percent increase in residential construction spending; this is good news for would-be home buyers who’ve been shut out of the market due to high demand and low inventories of available homes.

Housing market analysts have repeatedly said that new home construction is the answer to short supplies of homes and high buyer demand. Year-over-year, construction spending is up 8.0 percent overall; residential construction spending grew by 7.60 percent year-over-year.

Mortgage Rates Dip

Average mortgage rates were lower last week. The rate for a 30-year fixed rate mortgage fell by five basis points to 3.61 percent; the average rate for a 15-year fixed rate mortgage was three basis points lower at 2.86 percent and the average rate for a 5/1 adjustable rate mortgage dropped six basis points to an average of 2.80 percent.

While any drop in mortgage rates is welcomed by home buyers, the high demand for homes continues to drive prices up and has raised concerns about affordability of single-family homes in many communities.

Jobs Growth Slows

The national unemployment rate held steady at 5.0 percent in April, but job growth slowed in public and private sectors. ADP reported private sector jobs increased by 156,000 jobs as compared to 194,000 jobs added in March. According to the Bureau of Labor Statistics, Non-Farm Payrolls increased by 160.000 jobs as compared to expectations of 203,000 jobs added and March’s reading of 208,000 jobs added. Non-Farm payrolls measure public and private sector job growth.

New jobless claims rose by 17,000 to 274,000 new claims, but remained below the benchmark of 300,000 new claims for 61 consecutive weeks. Analysts projected that new claims would grow by 265,000 new claims based on the prior week’s reading of 257,000 new claims. The less volatile four-week rolling average of new jobless claims indicated that 258,000 new claims were filed. The labor force participation rate dropped from 65 percent to 63 percent in March. Retiring baby boomers contributed to some but not all of this workforce decline.

What’s Ahead

This week’s scheduled economic news includes weekly reports on mortgage rates and new jobless claims along with a report on consumer sentiment.

What’s Ahead For Mortgage Rates This Week – May 2, 2016

May 2, 2016 by · Leave a Comment 

Whats Ahead For Mortgage Rates

Last week’s economic news included Case-Shiller Home Price Indices, along with new and pending home sales readings. The Federal Open Market Committee of the Federal Reserve met analyst’s expectations and did not raise the target federal funds rate, which remains at 0.25 to 0.50 percent. Freddie Mac’s mortgage rates survey and the Labor Department’s weekly jobless claims report were also released.

Case-Shiller: Home Price Growth Slows in February

Average home prices growth slowed in February according to the S&P Case-Shiller Home Price Index. Home prices fell from January’s year-over-year reading of 5.70 percent to 5.40 percent. 13 of 20 cities included in the index showed slower growth in home prices. Portland, Oregon showed the highest year-over-year price gain at 11.90 percent followed by Seattle, Washington at 11.00 percent and Denver, Colorado at 9.70 percent

Washington, DC had the slowest year-over-year growth rate of 1.40 percent; Chicago, Illinois and New York, New York where home prices grew 1.80 percent and 2.10 percent respectively. S&P Index Chairman David Blitzer said that tight inventories of available homes continued to drive home prices. Analysts are concerned with shrinking affordability, which keeps first-time and moderate income buyers from buying homes. Analysts caution that first-time and moderate-income buyers are the “bread and butter” of housing markets. Without their participation, current homeowners cannot sell and move up to larger homes.

New Home Sales Lower after February Reading Revised

New home sales dipped in March to a seasonally-adjusted annual rate of 511,000 after February’s reading was revised upward to 519,000 sales. Regional results for new home sales were mixed. The Northeast posted flat sales in March; The Midwest posted the highest year-over-year growth in home prices at 18.50 percent followed by the South with a year-over-year gain of 5.00 percent. New home sales fell by 23.60 percent in the West, which was likely due to rapidly escalating home prices in high-cost metro areas.

Pending home sales for March grew by 1.40 percent for a second consecutive monthly increase. Analysts viewed March’s reading as positive for a healthy spring season for home sales. Pending home sales forecast future closings and mortgage lending.

Mortgage Rates, New Jobless Claims Rise

Freddie Mac reported higher mortgage rates last week with the average rate for a 30-year fixed rate mortgage seven basis points higher at 3.66 percent. 15-year fixed mortgage rates were four basis points higher at 2.89 percent; the average rate for a 5/1 adjustable rate mortgage was five basis points higher at 2.86 percent. Discount points averaged 0.60, 0.50 and 0.50 percent respectively.

New jobless claims also rose last week with 257,000 new claims filed as compared to expectations of 260,000 new claims and the prior week’s reading of 248,000 new claims filed. Analysts said that fewer layoffs suggest strengthening job market. Last week’s four-week average of new jobless claims was 256,000 new claims, which was the lowest reading since December 1973. Improving labor markets can encourage would-be home buyers to become active buyers.

What’s Ahead

This week’s scheduled economic news includes reports on construction spending, private sector employment, non-farm payrolls and the national unemployment rate. Weekly reports on new jobless claims and mortgage rates will be released as usual.

What’s Ahead For Mortgage Rates This Week – April 25, 2016

April 25, 2016 by · Leave a Comment 

What's Ahead In Mortgage News

Last week’s economic releases included Existing Home Sales, Commerce Department Releases on Housing Starts and Building Permits and the National Association of Home Builders/Wells Fargo Housing Market Index. Mortgage rates and new jobless claims were released according to their weekly schedule.

Home Builder Confidence Holds Firm in April

According to April’s National Association of Home Builders/Wells Fargo Housing Market Index, home builder confidence held steady with a reading of 58 for the third consecutive month. Analysts viewed April’s reading as a sign of steady expansion for home building, but builders noted concerns over labor shortages. NAHB Chief Economist Robert Dietz said that builders were “cautiously optimistic” concerning housing market conditions.

The National Association of Realtors® reported a jump in sales of previously owned homes in March. The seasonally-adjusted annual rate of sales rose to 5.33 million and surpassed expectations of 5.30 million sales and February’s reading of 5.07 million sales of pre-owned homes.Mr. Lawrence Yun, chief economist for NAR, said that demand is increasing and noted that the national average home price increased more than twice as fast as average wages.

In other housing-related reports, the Commerce department reported slower growth in housing starts, which reached 1.089 million starts in March. Analysts expected 1.170 million starts based on March’s reading of 1.194 housing starts. Building permits were also lower with 1.086 million building permits issued as compared to 1.177 million building permits issued in March.

National Association of Realtors®: Sales of Pre-Owned Homes Exceed Expectations

March sales of previously owned homes reached a seasonally-adjusted annual rate of 5.33 million sales against predictions of 5.30 million sales and February’s reading of 5.07 million sales. While March sales of pre-owned homes coincide with the approaching peak home selling season, high demand for homes and low supplies of homes for sale could slow sales. Inventories of available homes are currently at a 4.5 month supply; a six month supply of available homes indicates a normal reading for available homes.

Mortgage Rates Mixed, Jobless Claims Lowest Since 1973

Freddie Mac reported mixed results for last week’s average mortgage rates. The rate for a 30-year fixed rate mortgage was one basis point higher at 3.59 percent. The rate for a 15-year fixed rate mortgage was one basis point lower at 2.85 percent while the average rate for 5/1 adjustable rate mortgages fell by three basis points to 2.81 percent. Discount points averaged 0.60 percent for fixed rate mortgages and 0.50 percent for 5/1 adjustable rate mortgages.

Weekly jobless claims dropped to their lowest level since 1973 with a reading of 247,000 new claims filed. Analysts expected a reading of 265,000 new claims filed based on the prior week’s reading of 253,000 new claims filed. Strong labor markets can be an incentive to home buyers to move up to larger homes or transition from renting to owning, but short supplies of available homes and rapidly rising home prices present obstacles. First-time buyers account for approximately 30 percent of home sales; their participation could diminish unless available homes increase and demand for homes eases.

Whats Ahead

This week’s scheduled economic reports include the S&P Case-Shiller Home Price Indices along with new and pending home sales reports. Weekly reports on mortgage rates and new jobless claims will be released on schedule.

3 Reasons Why the Lowest Mortgage Interest Rate Isn’t Always Your Best Option

July 2, 2015 by · Leave a Comment 

3 Reasons Why the Lowest Mortgage Interest Rate Isn't Always Your Best Option One of the more common methods that home loan applicants use to find the best loan program available is to compare interest rates, but choosing the lowest rate possible is not always the best option available. In fact, in some cases, it may be one of the least advantageous options when all factors are considered. With a closer look, home mortgage applicants may decide to review other factors in combination with the interest rate to make a more informed decision when applying for a new loan.

The Closing Costs Impact The Rate

It is important to note that lenders can increase or decrease the interest rate with adjustments to closing costs, and this means that some of the lowest interest rates available may also have some of the higher closing costs. In some situations, choosing the lowest interest and paying more in closing costs is acceptable. However, a loan applicant should be aware of this and should compare interest rates along with closing costs in order to find the best loan program available.

The Loan Term Affects The Rate

Generally, a shorter loan term will have a lower interest rate. However, even with the lower interest rate, the mortgage payment may be higher due to the shorter term. A higher mortgage payment can impact affordability as well as loan qualification in some cases, and there are instances when the higher interest rate associated with a longer term is most desirable.

The Interest Rate May Adjust

Adjustable rate mortgages typically have lower interest rates than fixed rate mortgages, but the interest rate with an ARM may adjust higher in the future. For those who only plan to own the home or to retain the mortgage for a short period of time, this may be acceptable and even desirable. However, for those who plan to own the home or retain the mortgage for a longer period of time, the potential for a rate adjustment in the future may not be preferable.

For individuals who are shopping around to compare interest rates and to find the best deal on a mortgage, there may be a desire to opt for the lowest interest rate, but this is not always the best strategy. The interest rate can reflect many aspects of the loan, and each of these points should be analyzed to find the best loan program. A mortgage broker can provide assistance comparing loan terms and helping loan applicants determine which is the best solution for their needs.

Variable-rate vs. Fixed-rate Mortgages – Which is Better for Your Financial Situation?

March 18, 2015 by · Leave a Comment 

Variable-rate Vs. Fixed-rate Mortgages - Which is Better for Your Financial Situation? When applying for a new home mortgage, many loan applicants initially consider applying for a 30-year fixed rate mortgage. This is perhaps the most common and traditional type of mortgage available. It allows you to enjoy the opportunity to pay for your home over the course of 30 years with equal payments every month. While this is one option, there are actually multiple choices available. For some applications, a variable rate mortgage may be more advantageous. If you are comparing the options between a fixed rate and a variable rate mortgage, you may consider a few points.

A Lower Initial Interest Rate

When you compare the fixed rate and variable rate options, you will immediately notice that the variable rates have a lower start rate. The interest rate will influence the mortgage payment amount. Because of this, you will benefit from a lower initial mortgage payment with a variable rate. However, it is important to understand that the interest rate on a variable rate mortgage will adjust periodically over the life of the loan. This means that the mortgage payment will also adjust.

Managing A Potential Rate Adjustment

The true benefit of a fixed rate mortgage is the ability to better control your budget and manage your funds. A mortgage payment can be a large expense item in your budget, and it may be the largest single expense you have by far. An increase to your variable rate and therefore your mortgage payment can be difficult to bear if you have a tight budget with no wiggle room. In some cases, the rate may go beyond what is affordable for a homeowner to endure. If you do take on a variable rate loan, it is important that you understand what the highest possible interest rate adjustment is and what your payment may be with that rate. If you can manage that payment, then you may confidently apply for a variable rate mortgage.

If you are thinking about applying for a mortgage, it is important that you consider all of the options carefully and that you understand the key differences between them. You can speak with a mortgage loan officer or lending representative in detail to get more information about the options available to you. This can help you to make a better decision about your mortgage application and to better plan and budget for your future as a homeowner.

Understanding the Key Factors That Affect Your Mortgage Interest Rate

March 17, 2015 by · Leave a Comment 

Understanding the Key Factors That Affect Your Mortgage Interest RateWhen you initially start shopping for a home mortgage, you may be drawn to advertisements for ultra-low interest rates. These may be rates that seem too good to be true, and you may gladly contact the lender or mortgage company to complete your loan application. However, the unfortunate truth is that all too often, mortgage applicants are unpleasantly surprised and even disheartened to learn that they do not qualify for the advertised interest rate. By learning more about the factors that influence your interest rate, you may be able to structure you loan in a more advantageous way.

Your Credit Rating

One of the most important factors that influence an interest rate is your credit score. Lenders have different credit score requirements, but most have a tiered rating system. Those with excellent credit scores qualify for the best interest rate, and good credit scores may qualify for a slightly higher interest rate. Because of this, you may consider learning more about your credit score and taking time to correct any errors that may be resulting in a lower score.

The Amount Of Your Down Payment

In addition, the amount of your down payment will also play a role in your interest rate. The desired down payment may vary from lender to lender, but as a rule of thumb, the best home mortgage interest rates are given to those who have at least 20 to 30 percent of funds available to put down on the property, and this does not include subordinate or secondary financing. If you are applying for a higher loan-to-value loan, you may expect a higher interest rate.

The Total Loan Amount Requested

In addition, the total loan amount will also influence the rate. There are different loan programs available, but one of the biggest differences in residential loans is for very large loan amounts. The qualification for a jumbo loan will vary for different markets, but these loans qualify for different rates than conventional loans with a smaller loan amount.

While you may be able to use advertised interest rates to get a fair idea about the rate you may qualify for, the only real way to determine your mortgage rate will be to apply for a loan and to get pre-qualified. You can contact a mortgage lender today to request more information about today’s rates and to begin your pre-qualification process.

How Low Can They Go: With Mortgage Interest Rates Low, Should You Refinance?

January 13, 2015 by · Leave a Comment 

How Low Can They Go: With Mortgage Interest Rates Still Dropping, Should You Refinance?Do you have a mortgage? You’ve likely seen or heard a lot about mortgage refinancing as interest rates remained low in recent months.

In today’s blog post we’ll explore the topic of mortgage refinancing, including when you should consider refinancing and how to take advantage of low interest rates.

What is Mortgage Refinancing?

In simple terms, refinancing refers to the practice of taking out a new mortgage and using the proceeds to pay off your old one in its entirety. You’ll go through the full borrowing process with your chosen lender, including the credit check, financial history and employment history in order to ensure that you have the ability to pay your new mortgage – even if your monthly costs are lower.

Depending on your financial goals, you may refinance to tap into some of the equity you’ve built up in your home, or you may refinance in order to secure a new mortgage with a lower interest rate or better payment terms. Whatever the case, know that if you decide to refinance you’ll be engaging with a lender for a brand new mortgage.

When Should I Consider Refinancing My Mortgage?

When you should refinance depends on your reason for refinancing. If you’re looking to reduce your interest rate and your monthly payments, you should refinance your mortgage whenever interest rates drop enough that you will be able to save more in monthly payments then you will be paying in closing costs and fees.

Consulting with a mortgage professional is the best way to understand how much money you can save, but to get a quick idea simply take a look at how much you owe on your mortgage, your current interest rate and the types of rates you may qualify for. If you owe $200,000 at 5.5 percent interest and you can refinance down to 4.5 percent you’re going to save a considerable amount over the long term.

How to Take Advantage of Low Interest Rates

Refinancing your mortgage is a major financial decision and not one that should be taken lightly. Careful research is needed to determine if now is best time to switch up your mortgage to one with a lower interest rate.

Top Five Market Factors That Influence Mortgage Rates

March 28, 2010 by · Leave a Comment 

Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.

While there are several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.

Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile, living and breathing animal.

Lenders set their rates every day based on the market activities of Mortgage Bonds, also known as Mortgage Backed Securities (MBS).

On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.

Factors That Influence Mortgage Backed Securities:

1.  Inflation –

According to Wikipedia:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

As inflation increases, or as the expectation of future inflation increases, rates will push higher.

The contrary is also true; when inflation declines, rates decrease.

Famous economist Milton Friedman said “inflation is always and everywhere a monetary phenomenon.”

Public enemy #1 of all fixed income investments, inflation and the expectation of future inflation is a key indicator of how much investors will pay for mortgage bonds, and therefore how high or low current mortgage rates will be in the open market.

When an investor buys a bond, they receive a fixed percentage of the value of that bond as ‘coupon’ payments.

With MBS, an investor might buy a bond that pays 5%, which means for every $100 invested, they receive $5 in interest per year, usually divided up over 12 payments. For the buyer of a mortgage bond, that $5 coupon payment is worth more in the first year, because it can buy more today than it can in the future, due to inflation. When the markets read signals of increasing inflation, it tells bond investors that their future coupon payments will be less valuable by the time they receive them. So basically, this causes investors to demand higher rates for any new bonds they invest in.

2. The Federal Reserve

As part of its 2008-2010 stimulus effort, the NY Fed spent almost all of its $1.25 trillion budget buying mortgage bonds. Many believe this strategy kept mortgage rates lower over a 15 month period.

The lending environment significantly changed between 2008, when the Fed began its mortgage bond purchasing program, and early 2010 when the market was left to survive on its own.

When the MBS purchase program was announced in November 2008, mortgage bonds reacted immediately and dramatically.

But at that time, there weren’t any investors willing to take a risk in buying mortgage bonds. The meltdown in the mortgage market and world economies lead many investors to shy away from the risks associated with MBS, which is why the Fed had to step in and basically assume the role as the sole investor of mortgage bonds.

However, loan underwriting guidelines drastically tightened up by 2010, which may create a little more confidence in the mortgage bond market.

3. Unemployment –

Decreasing unemployment will suggest that mortgage rates will rise.

Typically, higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices. For example, the unemployment rate in March 2010 was at 9.7%, just slightly below its highest mark in the current economic cycle.

Every month, the BLS releases the Nonfarm Payrolls (aka The Jobs Report) which tallies the number of jobs created or lost in the preceding month.

The previous report indicated a loss of 36,000 jobs. Not necessarily a number that will move the needle on the unemployment gauge, but some economists suggest we need about 125,000 new jobs each month just to keep pace with population growth. So that negative 36,000 is more like negative 161,000 jobs short of an improving unemployment picture.

One flaw to pay attention to with unemployment rates is that the method of surveying fails to capture part-time workers who desire full-time employment, discouraged job seekers who have taken time off from searching and other would-be workers who are not considered to be part of the labor force.

4. GDP –

GDP, or Gross Domestic Product, is a measure of the economic output of the country.

High levels of GDP growth may signal increasing mortgage rates.

The Federal Reserve slashes short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, and inflation usually picks up. So high GDP ratings warn the market that interest rates will rise to keep inflation concerns in balance.

Spiking GDP with flat/increasing unemployment begs some questions.

There are two major indicators that help provide more context:

1. Increases to worker productivity – employers are getting more work out of their current employees to avoid hiring new ones

2. Surges in inventory cycles – when the economy first started contracting, manufacturing slowed down to cut costs, and sales were made by liquidating inventory.

This is like a roller coaster cresting a hill, where one part of the train is going up, the other down. Eventually, the other side catches up, inventories are rebuilt by manufacturing more than is being sold. Both surges can throw off periodic reports of GDP.

5. Geopolitics –

Unforeseen events related to global conflict, political events, and natural disasters will tend to lower mortgage rates.

Anything that the markets didn’t see coming causes uncertainty and panic. And when markets panic, money generally moves to stable investments (bonds), which brings rates lower. Mortgage bonds pick up some of that momentum.

Acts of terrorism, tsunamis, earthquakes, and recent sovereign debt crises (Dubai, Greece) are all examples.

…..

Putting It All Together:

Economic data is reported daily, and some items have a greater tendency to be of concern to the market for mortgage rates. If you are involved in a real estate financing transaction, it’s helpful to be aware of these influences, or to rely upon the advice of a mortgage professional who is already dialed in.

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What's The Difference Between Interest Rate and Annual Percentage Rate (APR)?

March 28, 2010 by · Leave a Comment 

The difference between APR and actual note rate is very confusing, especially for First-Time Home Buyers who haven’t been through the entire closing process before.

When shopping for a new mortgage loan, you may notice an Annual Percentage Rate (APR) advertised next to the note rate.  The inclusion of an APR is actually mandated by federal law in order to help give borrowers a standard rule of measurement for comparing the total cost of each loan.

The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate to prevent lenders from “hiding” fees and up-front costs behind low advertised rates.

According to Wikipedia:

The terms annual percentage of rate (APR) and nominal APR describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate. 

  • The nominal APR is the simple-interest rate (for a year).
  • The effective APR is the fee+compound interest rate (calculated across a year)

The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year.

However, the exact legal definition of “effective APR” can vary greatly, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees.

The effective APR has been called the “mathematically-true” interest rate for each year. The computation for the effective APR, as the fee+compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment.

What Fees Are Typically Included In APR?

  • Origination Fee
  • Discount Points
  • Buydown funds from the buyer
  • Prepaid Mortgage Interest
  • Mortgage Insurance Premiums
  • Other lender fees (application, underwriting, tax service, etc.)

Since origination fees, discount points, mortgage insurance premiums, prepaid interest and other items may also be required to obtain a mortgage, they need to be included when calculating the APR. Fees such as title insurance, appraisal and credit are not included in calculating the APR.

The APR can vary between lenders and programs due to the fact that the federal law does not clearly define specifically what goes into the calculation.

What Does APR Not Disclose?

  • APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change.  But Adjustable Rate Mortgages always change over the course of 30 years.
  • Balloon Payments
  • Prepayment Penalties
  • Length of Rate Lock
  • Comparison between loan terms – EX:  A 15-year term will have a higher APR simply because the fees are amortized over a shorter period of time compared to a similar rate / cost scenario on a 30-year term.

APR Comparing Examples:

  • Bank (A) is offering a 30 year fixed mortgage at 8.00% APR
  • Bank (B) is offering a 30 year fixed mortgage at 7.00% Note Rate

Easy choice, right?

While Bank (B) is advertising the lowest Note Rate, they’re not factoring in the origination points, underwriting / processing fees and prepaid mortgage interest (first month’s mortgage payment), which could essentially make the APR much higher than the one Bank (A) is advertising. So Bank (A) may show a higher rate due to the APR, but they could actually be charging a lot less in total fees than Bank (B).

…..

Before lenders and mortgage brokers were required to state the APR, it was more difficult to find the truth about the total borrowing costs of one loan vs another. When comparing mortgage rates, it’s a good idea to ask your lender which fees are included in their APR quote.

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How Are Mortgage Rates Determined?

March 28, 2010 by · Leave a Comment 

Many people believe that interest rates are simply set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.

The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors. When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.

That market price of those Mortgage Backed Securities (MBS) is what impacts mortgage rates.

Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments.

This perception of safety is due to the implied government backing of Fannie Mae and Freddie Mac and the fact that the Mortgage Backed investments are based on real estate collateral. So, if the loan defaults there is real property pledged against potential losses.

In contrast, other investments are considered more risky, specifically stocks which are based on earnings and profit vs real property.  The movement between the two investment vehicles often dictates mortgage rates.

Why Do Mortgage Rates Change?

Mortgage rates fluctuate based on the market’s perception of the economy.

Stocks are considered riskier investments, and therefore have an expected higher rate of return to compensate for that risk. When the economy is thriving, it is presumed that companies will perform better, and therefore their stock prices will move higher. When stock prices move higher – MBS prices generally move lower.  Mortgage Backed Securities, however, thrive when the economy is perceived as not doing well. When investors forecast a faltering economy, they worry that the return on stocks will be lower, so they frequently engage in a ‘flight to safety’ and buy more secure investments such as Mortgage Backed Securities.  Mortgage rates are actually based on the yield of those Mortgage Backed Securities.

Bonds are sold at a particular price based on their value in relation to other available investments.  When a bond is sold it yields a certain return based on that original purchase price.  As the prices of the MBS increases because investors seek their safety, the yield decreases. Conversely, when investors seek the higher returns of stocks and the MBS are purchased in lesser quantities the price goes down.  The lower price results in a higher yield, and this yield is what determines mortgage rates.

How Would I Know if Rates are Expected to Go Up or Down?

UP:

When the economy is growing or is expected to grow, stocks will likely become the more favored investment.

When investors buy more stocks, they purchase fewer MBS, which drives the price down.

When the price of the MBS is lower, the yield increases.

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to increase in this environment.

DOWN:

When the economy appears to be slowing or is doing poorly, investors typically move their money out of the stock market and into the safety of the MBS.

This drives the price of these investments higher, which results in a lower yield.

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to decrease in this environment.

Since these market variables and expectations change multiple times as economic reports are released throughout the course of a week, it is not uncommon to see mortgage rates change several times a day.

Understanding how rates move is not necessarily as important as having a loan officer that is equipped with the technology and professional services to track and stay alerted at the precise moment rates make a move for the better or worse.

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