Many people don't quite understand what causes mortgage rates to change. The media can cause all kinds of confusion and rarely give information that isn’t misleading or unclear for consumers. Here is the truth.
Many people don't quite understand what causes mortgage rates to change. The media can cause all kinds of confusion and rarely give information that isn’t misleading or unclear for consumers. Here is the truth.
The Federal Reserve affects short-term interest rate maturities, the Federal Funds rate and the Overnight lending rate. All three of these can have a direct effect on what our Prime rate is. Many often think that when the Fed meets and changes the Prime rate, that this means that mortgage rates follow. This is a major misconception.
The prime rate, although it does directly affect our home equities, it does not truly affect our mortgage rates. For example, prime has held strong at 3.25% since January of this year. This certainly does not mean you can go out and get a 30 year fixed at 3.25%. It does mean you might be able to find a local bank to offer you a 2nd mortgage as a home equity that would be tied to prime and adjust when prime adjusts. But as far as its tie to our traditional home loan rates, the Prime rate does not directly change them.
Mortgage rates are dictated by the trading of mortgage backed securities, which trade on a daily basis. The real correlation of mortgage rate changes stems from the relationship of stocks and bonds. Stocks and bond are competing for the same investment dollar constantly. This means that when investors feel the market is strong and economic news is strong, investors tend to feel more confident in higher risk investments, such as stocks. This ultimately takes away from bonds, which affect our mortgage loan rates. This means when stocks do well, bonds are poor and rates are higher. When the market is weak and economic news comes in not as good as to be expected, investors tend to like the stronger or more solid bond market.
This means that mortgage rates get lower and the stock market gets worse.
To break this down even further, when the Fed feels that rates need to be decreased in an effort to encourage the market, this often causes a stock market rally. But remember when stocks go up, bonds go down and mortgage rates go up. So this often does the complete opposite and actually increases the interest rates.
Then there are other times when the Fed decides it needs to increase the rates on short-term interest rate maturities, the Federal Funds rate or the Overnight lending rate. When this happens, it can often cause a stir in the market and create major sell offs of stock for fear that this will affect corporate profit margins. When this happens, these assets need to find a place to settle until the next rally comes. Usually, their new home becomes mortgage backed securities, which means our mortgage rates will go down.
Yesterday, Mortgage Bonds broke above some strong levels of resistance while we waited to see how the auction of the 3 year treasury notes were received. Today, we have some big news that could affect the market significantly in either direction. Bonds are still trying to hold what they broke through yesterday, but as we find out the results of the $23 Billion auction of 10 year Notes, as well as the Fed releasing its policy statement, the market could sway in either direction. Should be an interesting day to watch.
By Kelly Byrnes, Platinum Funding Solutions, Owner
http://platinumfundingsolutions.com/
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