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.
Prime Rate - Prime rate is one of the most publicized indexes in the news media. Prime rate is used as one of the indexes in adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, however the same factors that affect the prime rate also influence the interest rates of mortgage loans. Prime is an interest rate that banks generally charge to their preferred customers.
Recently, the prime rate, which is a short-term interest rate, has been increasing faster than the rates on longer term bonds. As a result, if you have a home equity line, you may want to consider refinancing it into a fixed-rate second which will likely carry a lower rate which will not change with the prime.
The Prime Rate is generally know as the rate that which banks will charge to lend money not only to their best customers but also to other banks. Many homeowners have become excitied when finding out that a Home Equity Line of Credit is available at the prime rate, thinking they are getting the money for the same rate as the bank's best customers. While that may be true, the fact is that when banks lend money at prime to their best customers it is usually unsecured rather than having to pledge real property as security as in the case of the Home Equity Line of Credit.
The Federal Banking Commission gathers usually 4 times per year, to decide wether they will raise, lower, or maintain the current Prime Rate.
APR - The APR (Annual Percentage Rate) is the percentage cost of the credit for which you are obtaining on a yearly basis. The APR was designed by the federal government to reveal the true total cost of getting a loan. The APR includes the interest rate and other added costs such as points, origination fees, and mortgage insurance (if applicable). The APR was created so that you can compare credit costs. Please keep in mind that the APR is not the same as the note rate. The note rate is the rate with which your monthly mortgage payments are calculated. The APR will always be higher than the note rate because it includes other closing costs required by the lender/broker.
When looking at a Good Faith Estimate(GFE), items that are used to calculate the APR should be checked in the PFC (Paid Finance Charge) Box to the far right side of the Good Faith Estimate(GFE).
LIBOR - LIBOR is the London Interbank Offered Rate. LIBOR is the rate charged by one bank to another for lending money. The LIBOR is an international index that follows world economic conditions. LIBOR-indexed ARMs (Adjustable Rate Mortgages) offer borrowers aggressive initial rates and have proven to be competitive with popular ARM indexes like the Treasury bill.
Compared to other Indexes, LIBOR is one of the least stable. It changes more often and by greater amounts
With the LIBOR ARMs borrowers are generally protected from wide fluctuations in interest rates by periodic and lifetime interest rate caps.
COFI - 11th District Cost of Funds (COFI) is an index that is used to determine interest rate changes for certain ARMs (adjustable-rate mortgage). COFI reflects the average interest rate paid by the member banks and savings institutions located in Arizona, California and Nevada. This index moves slower to market changes due to the laregest part of the index being based on savings accounts. The COFI is one of the most popular and considered the most stable of indices.
The source of these funds for COFI includes savings and checking accounts, money market accounts, short term CD accounts, advances by the FHLB District Bank, and other borrowed money.
Cost of Savings Index - The Cost of Savings Index (COSI) is an index used to determine adjustments to the interest rate on ARMs (adjustable rate mortgages). COSI is considered to be one of the most stable indices in the industry. The index adjusts monthly and is derived from money that is received by World Savings from consumers in the form of deposits and then lends the money in the form of mortgages and other loans. The interest rates in effect on these deposits are the basis for the COSI index.
The Cost of Savings Index is known for being a rather stable index, meaning less rapid upward and downward movement. Conversely, an index such as the LIBOR (London InterBank Offering Rate) has shown to be much more volatile with sharper up and down movements.
World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.
The COSI is not based on actual interest paid on deposit accounts, but rather on a weighted annualized rate of all interest rates in effect on deposit accounts as of the last day of each month.
