Important Information About Mortgage Interest Rates

As part of our partnership with Tim and Dave at Trusted Lending Advisors, I’ve asked Tim a couple of questions about mortgage rates. Some of this information might seem too technical, but if you are considering buying a home, this is important information to know!

How are mortgage interest rates determined?

There are several factors that contribute to the determination of mortgage interest rates. The largest factor in determining mortgage interest rates is the daily trading of Mortgage-Backed Securities (MBS) on Wall Street. MBS are a type of bond and are bought & sold daily by investors just like a Treasury Bond or any other type of bond or stock. Typically, but not always bonds move in an opposite relationship with stocks, so if the stock market is up, bonds are normally down, and vice versa. So, many people have heard about the Federal Reserve’s “Quantitative Easing” programs that have been in effect for the past 2 years, with the 3rd round or “QE3” taking place currently.

See this link for more info on QE3, but to simplify, the Federal Reserve (the Fed) has been printing more money to purchase MBS in an attempt to artificially keep mortgage rates low, which is the main reason rates have been at all-time lows in the past year. On many trading days, the Federal Reserve has been (by far) the largest buyer of MBS in an ongoing attempt to keep rates low to spur on the housing market recovery in an attempt to “stimulate” the overall economy. So, investor demand for MBS ultimately plays the key role in mortgage rates, and the current QE3 program is the key factor in the current low rates that we are temporarily enjoying. The Fed has recently announced that they hope to discontinue this program by the 3rd quarter of this year, and in response to that news rates are expected to begin increasing soon, and we are already seeing the beginning of an upward trend in rates developing in the market.

Each mortgage investor that services loans (mostly your large banks such as Wells Fargo, Chase, Citi, US Bank, etc) will also look at the price of MBS and try to set margins and pricing brackets & floors for themselves to help control the flow in and out of their capital and to help with profit margins.

To summarize and over-simplify: the bond market sets the rates, the government (The Fed) is currently “manipulating” this market, and bank pricing policies also contribute to the final rate that a consumer is charged for a home loan. As a result, rates change daily based on the most current market conditions.

What is an example of something that might cause interest rates to go up or down?

In a “normal market” changes in interest rates are primarily driven by investor demand and trading on Wall Street. Currently rates are being held at a low level by the Fed’s QE3 program. Bad news for the economy or in global markets tends to help keep mortgage rates low as well, because investors will often be drawn to the “safe haven” of bonds such as MBS when there is bad news in the economy and/or global markets that may have a negative impact on the stock markets. So, for example when all of the bad news started coming out of Europe in 2011-2012, this helped increase demand for mortgage bonds and helped contribute to lower mortgage rates. Another interesting note- MBS are US-dollar denominated assets, meaning they are bought & sold on the current conversion rate and strength of the dollar (versus the Euro, Yen, Yuan, etc).

So, if I’m a trader or particularly a foreign investor who may normally prefer to buy assets that are based on the Euro or another currency, the weakening of that currency (real or perceived) may make an asset that is based on US Dollars (such as US mortgage bonds) more appealing. This is another reason that bad news out of Europe, Japan, and China has benefitted our US mortgage bonds, also helping to keep rates low.

If you are considering purchasing a home or refinancing, I’d love to have you talk to Tim and Dave at Trusted Lending Advisors!  My husband-the-Realtor, Jeremy, works frequently with Tim and Dave and his clients always have a great experience.  You can call Trusted Lending Advisors at 719.266.8183 or contact them through their website.  Be sure to mention that you heard about them from Colorado Bargains, and you’ll be able to receive a lender credit for your appraisal (up to $400 value) on any closed loan transaction!

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