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)?
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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.
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. |
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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. |
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