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How Mortgage Rates Work and Why They Matter

December 16th, 2014 5:00 AM by Jackie A. Graves

Most of us know mortgage rates are important—after all, the difference between just one-eighth point in interest percentage could end up costing you thousands of dollars over the length of the loan.

All of us want a great mortgage rate. And if you’re trying to find the right time to lock-in a good one, it makes sense to know the basics about how mortgage rates move.

Bond Yields

Conventional mortgage rates are tied to U.S. Treasury bonds, particularly the 10-year bond. So a simple way to check for interest rate changes on conventional loans is by checking out current yields for 10-year bonds. You can find this information in a stock ticker, online or in a newspaper.

These are the two basic things you need to know about bond yields and mortgages:

  • If bond yields increase, mortgage rates increase.

  • If bond yields decrease, mortgage rates decrease.

    Remember, it’s not the price of the bond; it’s the bond yield that matters.

    Adjustable Rate Mortgages

    Adjustable Rate Mortgages (ARMs) are different. ARMs are short-term interest loans, so they are affected mostly by the Federal Reserve (Fed) funds rate.

    Other things affected by the Fed funds rate are interest rates on credit cards, CDs and savings accounts.

    The Economy

    When the stock market is doing poorly and investors are selling, you can expect interest rates to lower. This is because investors, fearing a bad economic climate, transfer their money into the safety of U.S. Treasuries.

    With more money pumped into this bond market, the higher the demand and the lower their yield becomes—the result is that mortgage rates fall.


    One reason mortgages rates can drop is because of the Fed buying up bonds—something that happened shortly after the Great Recession.

    While this stimulus can happen over several years with billions and billions of dollars, it has to stop at some point. When that happens, interest rates are no longer being held down by the Fed’s money.

    Interest rates are generally expected to rise after such a stimulus. The Fed will announce when it stops pumping money into the bond market, although news sources will anticipate the move.

    What to Look for

    When trying to pin down low interest rates, keep an eye on world and national events. If something scares investors—like a disease outbreak, conflicts, war or terrorism—to take their money out of the stock market, mortgage rates will typically fall.

    Rule of thumb: If the economy is running strong, interest rates will usually rise.

    Always keep an eye on inflation, because it can spike mortgage rates. During the inflation-plagued 1980s, interest rates soared as high as 16.63% for 30-year loans. Historically, those interest rates have averaged about 5.5%.

    Finally, remember this: It’s hard, if not impossible, to predict exactly where the economy will move in the future. Don’t get too caught up in trying to chase down a perfect interest rate—it may be more realistic to settle for a merely good one.

    By: Craig Donofrio | To view the original article click here

Posted by Jackie A. Graves on December 16th, 2014 5:00 AM


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