Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

I'm trying to determine whether to lock in my interest rate or wait, and that led me to the broader question of what factors influence mortgage rates (both upwards and downwards)?

share|improve this question

2 Answers 2

up vote 5 down vote accepted

If you owned a bank how would you invest the bank's money? Typically banks are involved in loaning out money to businesses, people, and government at a higher interest rate then what they are paying to depositors. This is the spread and how they make money.

If the bank determines that the yields on government bonds is more attractive then loaning the money out to businesses and people then the bank will purchase government bonds. It can also decide the other way. In this manner the mortgage and bond markets are always competing for capital and tend to offer very similar yields.

Certain banks have the unique privilege of being able to borrow money from the FED at the Federal Funds rate and use this money to purchase government debt or loan it out to other banks or purchase other debt products.

In this manner you see a high correlation between the FED funds rate, mortgage rates, and treasury yields.

Federal Funds Rate 30 Year Mortgage Rates 30 Year Treasury Yields

Other political factors include legislation that encourages mortgage lending (see Community Reinvestment Act) where banks may not have made the loans without said legislation.

In short, keep your eye on the FED and ask yourself: "Does the FED want rates to rise?" and "Can the US government afford rising rates?" The answer to these two questions is no. However, the FED may be pressured to "stop the presses" if inflation becomes unwieldy and the FED actually starts to care about food and energy prices. So far this hasn't been the case.

share|improve this answer
1  
+1 awesome answer. Also you should be awarded a badge for using charts and graphs a bunch =) –  MrChrister Mar 31 '11 at 15:40
    
@muro, thanks for the answer, I like graphs! The big picture is clear, but what about shorter term events and smaller rate movements? Looking at the last nine months or so, it seems the larger economical climate has not changed much, yet rates went from approx 5% to 4.3%, back to 5% and are now at 4.75%. What could be the cause of those smaller (but still important) fluctuations? –  Korneel Bouman Mar 31 '11 at 18:18
    
@MrChrister - Thanks. –  Muro Mar 31 '11 at 18:37
    
@Korneel - I find it difficult to determine the cause of day-to-day rate moves. I would pay very close attention to FED announcements in regard to further "quantitative easing" to keep rates down. If they truly stop printing money to buy US treasuries this June (the end of QEII) then rates are going to go up in a short time frame. You may want to get in before then because I don't think rates are going to go much lower. –  Muro Mar 31 '11 at 18:39
    
@muro - thanks! –  Korneel Bouman Mar 31 '11 at 19:33

Without commenting on whether or not it's needed I don't think we are going to see a QE3 and all the political pressure is for some reason to start raising rates. Regardless of how it plays out it's safe to say that the Fed Rate isn't going any lower.

You should also watch closely what happens to Fannie and Freddie. If they are dismantled and government backed mortgages become a thing of the past then I think it'll become impossible for a consumer to find a 30 year fixed rate mortgage. Even if they are kept alive, they will be put on a short leash and that will serve to further depress the mortgage market.

Long story short, I'd lock your rate in.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.