While a lot of pundits think that mortgage rates are determined by the 10 year note, they’re not. Mortgage rates are determined by Mortgage Backed Securities, which these days are sold mainly by Fannie Mae and Freddie Mac. These are bonds sold at different yields and act just like any other bonds, while prices go up rates go down and vice versa.
So what does affect the prices of mortgage bonds causing rates to rise or fall?
1. Inflation – Inflation is bad for mortgage rates. Rising inflation erodes the return bond investors like to get for their long-term holding, hence require higher rates.
2. Federal Reserve – The Fed does not determine mortgage rates. The only tool the Fed has is short-term/overnight rates. Since the Fed’s mandate is to fight inflation they will usually raise short-term rates. Market perception, and so does investors’, will translate that as higher inflation hence causing rates to go up.
3. Lock vs. Float - Interest can not be locked until there’s a property address attached to the loan. Until the rate is locked it fluctuates with the market and can change on a daily basis, sometimes more than once a day. When locking rate please make sure you know the length of time the rate is locked for (30, 45, 60 day) as once rate lock expires you can lose that rate and/or pay additional monies to extend it.
Orin Orkin is works for Wells Fargo and is a regular contributor on home mortgages. For more information contact him at Oren.Orkin@wellsfargo.com
Posted on
Tue, April 12, 2011
by Oren Orkin
filed under