The interest rates assigned to a home loan (mortgage). Based on price of mortgage-backed securities (MBS)- bonds backed by U.S. mortgages. Vary between conventional, FHA, VA, USDA, and jumbo loans; and by mortgage lenders.
How They're Made:
Some want a ball park number, some want a personalized one. You don't want to overpay on a mortgage, so you want to make sure you get a good rate.
- "Made" based on bonds traded in mortgage-backed securities (MBS) market. Mortgage-backed bonds trade all day, everyday.
-MBS changes constantly.
-Mortgage bond based on supply and demand:
- When wall streets demand for mortgage bonds increases, mortgage bond prices rise = mortgage rates drop.
- Mortgage rates and MBS prices move in opposite directions.
Demand for mortgage bonds change for multitude of reasons-- the most common is risk avoidance.
Most mortgage-backed bond guaranteed by U.S. government-- "extra safe".
Mortgage rates are subject to "adjustments"; price changes made by agency which secures the bond.
Things that don't control mortgage rates:
They're based on price of mortgage-backed securities, no other direct forces on U.S. mortgage interest rates.
Good mortgage rate shopping:
- 10-Year Treasury Note: 10-year treasury note is a debt-issuance from U.S. treasury, and overtime the 10-year and mortgage-backed bonds will trend together, but can diverge.
- Federal Reserve: Federal Reserves primary policy tool- Federal Funds Rate- unlinked to mortgage rates.
- An overnight interest rate at which banks borrow money from each other. It's an interest rate given by Federal Reserve and used to change speed at which U.S. economy expands.
- Federal Funds Rate linked to current mortgage rates, there would be a linear relationship between the two.
- Congress: Or any other elected U.S. official.
- They can't affect demand for mortgage-backed securities world-wide; can change how loan-level pricing adjustment are used; but influence remains indirect.
- Shopping for mortgage rate is shopping for associated closing costs.
- Mortgage lender will never quote a rate without telling you fees that go with it so pay attention when you get a quote.
- 2 Ways to Shop:
- for a particular mortgage rate you want.
- for a particular closing cost you want.
~When you can isolate a single loan variable for comparison such as "cost" or "mortgage rate"
~To find a lender, ask each what the interest rate would be assuming no closing cost whatsoever.
How to time mortgage rate lock:
after choosing lender, want to have lender execute a rate lock commitment on your behalf.
- commitment from bank to honor specific mortgage rate for specific number of days.
- state lender will close loan at agrees-upon mortgage interest rate.
- risky to a bank because anything can happen prior to loans closing. Longer for which rate lock commitment lasts, more risk bank assumes and higher interest rate.
- 15 day rate = 30 day mortgage rate- 12.5 basic points (0.125%)
-30 day rate = market rate
-45 day rate= 30 day mortgage rate + 12.5 basic points (0.125%)
-60 day rate = 30 day mortgage rate + 25 basic points (0.25%)
~~ Also important to refinancing households.~~