December 16th, 2014 5:00 AM by Jackie A. Graves, President
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.
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
These are the two basic things you need to know about
bond yields and mortgages:
If bond yields increase, mortgage rates
If bond yields decrease, mortgage rates
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.
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
One reason mortgages rates can drop is because of
the Fed buying up bonds—something that happened shortly after the Great
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