Current Mortgage Interest Rate Information
FHLMC (FreddieMac) publishes a weekly survey of mortgage rates that the news media is always referring to. The trouble is that when they do so, they get two things wrong:
They quote last week’s information as if it were available today.
They almost always forget to mention the points (or cost) associated with the rates in the survey.
Can you see what’s wrong with the following sentence, “mortgage rates are dropping as last week’s FHLMC survey showed…”?
Interest rates change daily, sometimes multiple times a day when financial markets are volatile. So the above sentence implies that rates are dropping this week, based on last week’s news. Who would buy a stock based solely on what it did last week and not look at what it was doing today? Click on the FHLMC link above to see what the survey shows for yourself.
There aren’t many free online services where Mortgage Backed Securities (MBS) can be accesses live. We’ve found one that currently works (click here), but please be cautious when referencing it. We take no responsibility for its availability or accuracy. For more information on why MBS should be tracked, read below.
Shopping for a Mortgage
Every borrower wants to get the best interest rate they possibly can. It’s human nature.
The challenge is balancing that goal with what’s realistic.
Many borrowers make the mistake of treating a mortgage like a commodity – only focusing on the price and ignoring all other variables. These same borrowers though, think nothing of paying more for similar commodity items like coffee and haircuts.
Why?
A mortgage is a much bigger financial commitment and a more complex service than a cup of coffee or a haircut. Wouldn’t it make sense to focus a bit more on getting the best advice and expertise? Borrowers shopping for a mortgage solely on price are usually being “penny-wise & dollar-foolish.”
Here are some issues that should be kept in mind when deciding where to get your mortgage:
- What’s their reputation for quality of service?
- Will you be bait & switched?
- What happens if the cheapest company can’t get your loan closed on time or at all?
- Does the lender have enough expertise to assist you in deciding when to lock in an interest rate?
- Do they have a system to proactively keep you informed of your loan’s process or will you be in the dark unless you call?
- What will their customer service be like after closing when you have a question or problem?
- Rates change daily, sometimes multiple times a day. So, how are you going to get a true comparison?
The current housing crisis and resulting record foreclosures should have every potential borrower more concerned than ever with quality over price. Here are some questions you should ask any lender you consider doing business with. We’ve supplied the answers with websites where you can verify them. If the lender can’t answer these questions correctly RUN, don’t just walk away!
- What are mortgage interest rates based on?
The correct answer is Mortgage Backed Securities (MBS), NOT the 10-year Treasury Note. At best the 10-year Treasury is a leading indicator for MBS. DON’T work with a lender whose eyes are on the wrong indicators. [more info] - What affects mortgage interest rates?
The real answer is the amount of INFLATION anticipated by the financial markets and also the SAFETY of those markets. The financial markets react to new economic data and world events with this in mind. [more info] - What is the next Economic Report or event that could cause interest rate movement?
A professional lender will have this at their fingertips. [more info] - When the Fed “changes rates”, what does this mean for mortgage interest rates?
The Fed only has direct control over the “Fed Funds Rate”, an overnight rate that the Prime Rate is based on which impacts credit cards, credit lines, & auto loans. Mortgage rates will often move in the opposite direction of a Fed change! For more information & explanation, just call. [more info] - What is happening in the market today & what do you see in the near future?
If a lender can’t explain how MBS and interest rates are moving at the present time, as well as what is coming up in the near future, you’re talking with someone who’s still reading last week’s newspaper, and probably not a professional with whom to entrust your home mortgage financing. Contact us to discuss current events that could affect mortgage rates.
What Affects Mortgage Rates?
Many consumers eagerly follow mortgage rates trying to time a refinance or in anticipation of buying a new home. Most don’t really understand the dynamics of what causes mortgage rates to change. What follows is an explanation of how this occurs. Please note, many of the concepts have been simplified to make them easier to understand & follow. Contact us if you’d like a deeper explanation.
How Often Can Mortgage Rates Change?
First it’s important to understand that mortgage rates can change just like stocks, by the minute! Normal practice though, is lenders set their rates daily. They take a peek at the financial markets when they open to get a feel for how the day may go, and usually publish their rates between 10am and 12am. Lenders do reserve the right to change rates at any time without notice, if market conditions change dramatically enough later in the day. Of course, lenders are more likely to raise rates rather than lower them.
What Causes Mortgage Rates to Fluctuate?
In one word, INFLATION! More accurately, it’s the financial markets’ anticipation of inflation that causes mortgage rates to change. So now you need to understand inflation.
Why Does Inflation affect Mortgage Rates?
Inflation is the nemesis of long-term investors. Over time it causes prices to rise & buying power to decline. For example, let’s say you won a lottery that paid you $1,000 every month for 30 years. At first, that $1,000 would buy a lot of things, but over time as prices went up, you’d be able to buy less & less with that same $1,000.
In the same way, inflation eats away at the value of a long-term fixed instrument like a bond or a mortgage. Because bond investors are very aware of this, they’ll require a higher rate of return, through a higher interest rate, on their investment to compensate them if they feel inflation will be increasing.
How can I Track Mortgage Rates?
Many people mistakenly think mortgage rates change with the 10-year bond. Actually, mortgage rates change based on the trading of Mortgage Backed Securities (MBS) on Wall Street. The 10-year bond can be used as a leading indicator of what MBS & mortgage rates are doing, but it’s important to understand that this is not always accurate.
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What’s a Mortgage Backed Security?
When a lender gives someone a mortgage, they may or may not be actually lending their own money. They may be actually lending money off a credit line. In either case, at some point they will usually seek to recoup their money so they can lend it to the next customer. To recoup their money they go to Wall Street and sell the rights to the loan, but retain the servicing of the loan. This transaction is accomplished through the creation of a Mortgage Backed Security (MBS). So when you make a payment on a mortgage, the lender receiving your payment keeps part of the interest as their fee for servicing the loan, and then forwards the rest of your payment to Wall Street and whoever owns the MBS. Just like stocks & bonds, MBS are traded on Wall Street. The changing sales prices of the MBS, lead to changes in mortgage interest rates.
Does Anything Else Affect Mortgage Rates?
The stock market also has an effect on mortgage interest rates. It’s important to understand that there’s a limited amount of liquid assets or money in the financial markets. These assets can be in the form of checking & savings accounts, mutual funds, individual stock portfolios, and retirement funds like IRA’s & 401(k)’s. They can be invested in two basic parts of the financial market – equities (stocks) or fixed instruments (bonds and securities). When investors put assets into stocks and drive the stock prices up, they pull those assets out of the bonds & securities. This drives the prices of bonds & securities down (basic supply & demand) forcing the yields or interest rates up. Conversely, when there’s a sell-off in the stock market, those assets are put into bonds & securities for safety, resulting in rates dropping.
World events also affect the financial markets. War, political turmoil or a foreign country’s economic problems can make international investors nervous enough to put their assets into the U.S. bond & securities markets as these markets are perceived to be the safest havens in the world. This “flight to quality” can cause interest rates to drop in spite of inflationary concerns.
The Federal Reserve & Mortgage Rates
Many consumers incorrectly believe the Federal Reserve directly controls mortgage rates. The Fed actually only controls the Fed Fund & Fed Discount Rates, which are very short-term loans when compared to a 30-year mortgage. The Fed Discount Rate is the interest rate that banks can borrower money directly from the Federal Reserve at the “discount window”. The Fed Fund Rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. This rate affects the Prime Rate that banks set. Most Home Equity Lines Of Credit (HELOC) and credit card rates are tied to Prime. The Fed uses the Fed Fund Rate to try and control the U.S. economy, lowering the rate to stimulate the economy and raising it to slow inflation. It’s what the bond & securities markets anticipate the Fed’s actions will have on inflation that dictates what mortgage rates will do! Often when the Fed lowers its rate to stimulate the economy, the financial markets will anticipate inflation increasing and will react by raising interest rates. Conversely, mortgage rates often drop when the Fed increases the Fed Rate because the markets anticipate the Feds actions slowing inflation.
It’s important to note that sometimes the financial markets can be disappointed in the Feds actions and will react in unanticipated ways. Also, the fact that we are moving closer to a global economy means it’s also important how foreign markets react to the Feds movements.
Summary
Hopefully, this sheds some light on the complicated dynamics affecting mortgage rates. The average person can no more predict what mortgage rates will do on any given day, than they can predict what the stock market will do. The key is finding a Certified Mortgage Expert who can assist you in analyzing the volatility of current market conditions when you’re ready for a new mortgage, so you can make a better informed decision.