At first glance, applying for a home mortgage loan may seem like quantum physics but not if you familiarize yourself with mortgage rate fluctuation. One of the primary benefits of learning about changing mortgage rates is an increased understanding on what affects how much you pay for your mortgage. Expanding your knowledge will better equip you to monitor mortgage rates and partake in an active conversation with your lender. Sometimes asking the right questions is all it takes. Let’s dive into the basics.
Although supply, demand, and inflation are the basic factors in mortgage rate fluctuation, the secondary mortgage market is a key influence. The secondary mortgage market is where most mortgage loans are bundled together into Mortgage Backed Security (MBS). These securities are then bought by institutional and private investors. Due to the investor’s interest in higher rates and the homeowner’s in lower rates, the market can be quite competitive; making the price the investor is willing to pay a determining factor in rate
fluctuation. As an aside, for a portion of the interest, the institution that collects your mortgage payment is generally only servicing the monthly principle and interest payments that ultimately benefit these investors.
The Federal Reserve is another contributing factor because it purchases large quantities of mortgage backed securities, which directly affects supply and demand and causes competition for investors. Theoretically, when the Fed buys more mortgage backed securities, it increases the supply of available mortgage funding. This increase in supply puts downward pressure on mortgage rates, which sparks an increase in consumer spending on home purchases and refinancing. Contrarily, a pull-back in the Fed’s buying might suggest the economy is growing at a pace faster than desired and thus an interest rates rise effectively hampers inflationary pressure.
Monitoring the secondary mortgage market and the Fed’s activity can provide you daily information on the current status of mortgage rates.
Additionally, you should keep a keen eye on movements in the 10-year Treasury Bond Yield. A bond is a large-scale, low-risk IOU issued by the government in order to raise needed capital. These bonds are offered through banks and investment firms to investors like you and me under the agreement that it
will be paid back over time with a small percentage of interest. During times of economic uncertainty, investors move money away from the risk of stocks and into the safety of bonds. This increase in bond demand drives the price of the bonds higher which in-turn lowers the amount of interest yielded back to the
investor. The opposite is true in times of economic confidence. Moreover, when the 10-year bond yield increases in times of economic confidence, mortgage rates will generally increase and when the bond yield
decrease in times of economic uncertainty, mortgage rates will generally decrease.
Since bond markets are an underlying force in rate fluctuation, you should monitor activity via designated websites or financial news.
Aside from movements in the secondary mortgage market and bond yields, you can also learn a lot by paying close attention to benchmarks and the composite index of leading indicators. Financial markets establish benchmarks, a measurement of performance, to determine where interest rates might be
proceeding. Analysts use various indexes to evaluate the performance of investments which can aid you in following mortgage rates. Similarly, the composite index of leading indicators is a monthly index published by the Conference Board. The index is composed of ten economic components, from manufacturing worker’s weekly hours to consumer sentiment, and its sole purpose is to predict near-future economic movement.
The bottom line is that paying attention to the above factors pays off. Now that you have educated yourself on the primary causes of mortgage rate fluctuation, you are equipped to ask the right questions. In addition to seeking more information on the above points, ask your lender what they use to monitor mortgage rates so that you may be on the same page. Once again, asking the right questions is all it takes to negotiating an interest rate you can afford.