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Ever Wonder Why Mortgage Interest Rates Change?
A common misconception among potential home buyers who anxiously track the rise and fall of mortgage-interest rates is that the Federal Reserve controls mortgage rates. The truth is that the price of 10-year Treasury Notes and general economic conditions has a lot more effect on the direction of mortgage-interest rates than what the Federal Reserve does.
Mortgage-interest rates can change every day and even several times during the day. How can you tell if they’re heading up or down? For conforming 30-year fixed-rate mortgages, pay attention to what’s happening to yields on 10-year Treasury notes, published daily on Web sites like Bloomberg, CNBC or Google Finance.
Treasury notes are correlated with mortgage rates because they compete with mortgage notes for investor dollars. The same investors who consider putting their money into federally guaranteed Treasury notes also have the option to buy bundles of mortgages sold after home buyers close on their loans. On the other hand, the interest rates that the Federal Reserve help set – called federal funds rates – pertain to money large banks borrow from each other to meet overnight reserve requirements. Although federal funds rates tend to affect interest rates on consumer loans like credit cards and car loans, their short-term nature has much less effect on longer-term debt like mortgages and Treasury notes. Indeed, mortgage-interest rates can sometimes move in the opposite direction of federal funds rates set by the Fed.
Historically, 30-year fixed mortgage rates have averaged about 1.7 points above 10-year Treasuries, but the relationship isn’t totally linear. The spread can vary depending on general economic conditions like inflation, unemployment and the value of the dollar. Mortgage-interest rates tend to rise faster than Treasuries if inflation is expected to increase, unemployment is heading lower or the value of the dollar falls. Mortgage rates tend to fall as inflation falls, unemployment rises and the dollar strengthens.
A general rule-of-thumb is that for every 1.5% (48/32nds) change in the price of the 10-year Treasury note, mortgage-interest rates will adjust 1/8th (0.125) of a percent.
Rates on jumbo fixed mortgages – mortgages $417,000 and above – tend to be higher than conforming loans, with the rate spread growing in times when demand for these mortgages exceeds supply.
Variable-rate mortgages are another story. They tend to rise and fall in relation to key indices like LIBOR, which is the average interest rate that five major international banks charge each other to borrow U.S. dollars.
Wondering whether now is the time to get the best mortgage-interest rates? Check to see where Treasury notes – and the economy as a whole – are heading. What’s more, a daily rate lock advisory with commentary is available at:
http://www.877-77COWEN.com/DailyRateAdvisory
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