How Market Conditions Affect Interest Rates - When the Chairman of the Federal Reserve lowers “rates,” he lowers the “Federal Funds” rate. Its the interest rate at which large banks lend funds to one another and is a “short-term” rate. Mortgage interest rates are long-term, up to 30 years. Longer-term interest rates are sensitive to expectations about inflation. When short-term rates fall, like the ones the Federal Reserve controls, borrowing and spending usually increase, which can actually cause inflation. Longer-term rates, like mortgage interest rates, can rise when concerns about inflation increase.Bond prices and bond yields have a direct effect on long term interest rates. Bond prices and bond yields always move in opposite directions (if one pays more for a bond, the yield decrease, and vise versa). Bond prices, hence their yields, are affected by many economic indicators. Some of the monthly economic indicators the bond market pays close attention to are Non-Farm Payrolls, Unemployment Rate, and Gross Domestic Products, Consumer Price Index, Producer Price Index, and Retail Sales. As a rule of thumb, when these economic indicators forcast a strong or inflationary economy, bond prices fall and bond yields increases, interest rate will go up. If a weak economy or low inflation is expected, bond prices rise, bond yields falls and rate will fall.
When the Stock Market is in a Bull trend (Up Trend) it is indicative of monies flowing into the market. Historically, The stronger the up trend in stocks, the weaker the realestate market will be durring the same period. Weak realestate markets (lack of demand) will result in declining prices in home values, which usually correlate to a rise in mortgage interest rates.
One aspect of the economy that can cause interest rates to rise is inflation. One of the reasons interest rates were so high back in the 1980's was that the market felt that inflation was out of control. Investors demand high rates of return when there is inflation because they are investing or loaning with today's dollars and being repaid with tommorrow's money. If the market senses inflationary trends, interest rates will usually rise.
Many domestic and international investors, particularly those investing in the country's stock and currency markets, will respond to a hike in interest rates by moving money out of the country. This is due to a belief that the increased cost of borrowing will weaken balance sheets and devalue equities, thereby creating a ripple effect which weaken's the country's currency.
Because Adjustable Rate Mortgages and Fixed Rate Mortgages are affected differently it is very important to find a mortgage professional who understands the market conditions and the relation between the bond markets and interest rates. Your mortgage broker can help you make the decision on when to lock a rate which can save you thousands of dollars over the life time of your loan. He can also help you choose the right program!
It is important to note that Adjustable Rate Mortgages (ARMs) and Fixed Rate Mortgages are affected differently by an increase made by the FED or Federal Reserve. The FED makes adjustments to the short term rates which in turn affects things like the bond market, a key determining factor in the 30 year fixed rate. The 30 year rates work in the opposite direction to the 10 year note. If the price of the 10-yr note falls, the rates rise.
Adjustble rates are comprised of two things an Index, and a Margin. The margin is set by the banks so when the FED adjusts the rates, banks in turn make adjustments. The Index is a regularly published rate that is independent of the lender and generally used as a market indicator. Examples of and Index would be: PRIME, LOBOR, MTA, COSI, etc.
Markets are often ahead of the Federal Reserve. Mortgage interest rates are determined every day in active public markets. If those markets believe the economy is slowing, interest rates may fall as markets anticipate that the Federal Reserve might lower short-term rates. This happened in the last half of 2000 when mortgage rates began steadily dropping, even though the Federal Reserve left their short-term rates unchanged. The opposite can happen as well. Mortgage rates can rise well ahead of the Federal Reserve increasing short-term interest rates.
It's almost impossible to accurately predict the future of something as complex as the U.S. economy. However, it is important that we, as mortgage consumers, understand some of these market dynamics. Sometimes, a lack of understanding can cost us a lot of money.
This is why it is important to "shop" for your mortgage with lenders on the very same day. Key factors can see mortgage rates changed several times in a given week, sometimes in the same day. The lender that you get a rate from on Monday may not be able to give you the same rate on Wednesday.
Interest rate changes - When shopping for a mortgage, you should be aware that mortgage rates change from day to day due to many factors in the economy.
Fixed mortgage rates and long term rates, such as bond rates, move in tendum. As a rule of thump, when economic indicators forecast a strong economy, bond prices fall and bond yields rise, long term rates tend to go up. The opposite is true. When the economy is expected to slow down, bond prices rise and bond yields fall, long term rates tend to head down.
Always ask for a rate lock confirmation once your rate is locked so that your mortgage consultant does not ever try to pull the ole "bait and switch" on you when it comes time to close. This is done when the mortgage consultant quotes you a rate and then tells you at the end, at closing or right before, that something happened to the rate lock or the rate when up right before he/she locked your rate in and then at the end, most borrowers will not want to go through the loan process again so they stick with the higher rate and the current proposed mortgage loan. Unfortunately I have heard this story a few times when clients have dealt with some untrustworthy mortgage professionals. However you can avoid this from possibly happening by requesting a rate lock confirmation immediately upon rate lock.
To protect you against interest rate changes your loan officer can lock the rate on your loan. A thirty day lock will normally be included in the price of the loan as quoted. If you need to lock for longer than thirty days you may have to pay a slightly higher origination fee or rate. Some lenders do not allow pre-locks meaning your loan cannot be locked until a complete application and the borrowers documentation is submitted to the lender for underwriting.
When your mortgage professional takes your application and comes back with a rate, if that rate is acceptable to you,, you should lock that rate as soon as possible. The possible frustration and anger from having your rate go up is greater than the possible satisfaction from having your rate go down.
A rate lock is good for a fixed period of time, 15, 30 or 45 days. If the loan has not been closed during the rate lock period the lock is void. Most lenders will allow for rate lock extensions but it will affect the cost of your loan since the broker is charged by the lender for the extension.
When doing a refinance loan the 3 day right of rescission must be considered in the rate lock period, so the closing must happen 3 days prior to the rate lock deadline.
When shopping rates also make sure to get an estimate of closing costs and whether there are points or not. This may explain why a broker will give a rate .5% lower than another.
Market factors and the economy affect the intererst rate changes every day. The bond market in particular effects interest rates greatly. Changes in the bond market occur constantly, while the stock market is open, and these changes can have a good or bad impact on the direction the interest rates head in each day.
Interest rates can even change throughout the day with the same lender that is why when rate shopping it is important to compare the same products at the same time. Since rates can fluctuate so often make sure you get more information about the mortgage company, you may find that the service one company provides is much more important than a small difference in rate that could just be a market change.
Keep in mind that if you are a sub prime borrower your lender may not allow you to lock the rate. In this situation your rate will float to close. Meaning the rate of your loan could go up or down depending on the market when you close your loan. Your mortgage broker should keep you updated on rate changes.
What determines my interest rate? - There are a great number of factors that affect the interest rate that you will receive on your mortgage loan. Lenders base the interest rate on how much risk you represent to them. They are lending a considerable amount of money, and need to know that they will receive a safe return on their investment.
The type of property being used to secure the mortgage may also have an effect on the interest rate. It is no secret interest rates on commercial properties are higher than that on residential houses. Some banks also charge higher interest rates on cooperative units.
The main and most obvious factor in determining your interest rate is going to be your credit history and your credit scores. Your credit actually affects many different things other than just mortgage interest rates. Your homowners insurance premiums, auto-insurance premiums, credit card rates, all other loan rates, and much more. This is why it is very important to keep your credit in good standing, all payments made on time, and not to let accounts go into collection.
The mortgage program can also determine your interest rate. Obviously 30 year fixed rates will be different than 15 year fixed rates. The same is true if you are doing a stated income, or no doc loan. The less documentation, the greater the chance that the interest rate will be higher.
The residency status of the property will also affect your interest rate. Investment or Non Owner Occupied properties will carry a higher interest rate due to the increase risk involved.
Loan to value ratio is another key driver of the interest rate. That is, the amount of the mortgage loan divided by the appraised value of your home. If below 80%, you'll qualify for the best rates. As the LTV increases, rates will also increase as this represents additional risk for the lender.
