Mortgage Rates

Mortgage Rates questions and answers

Learn more about a Balance Sheet at TeenAnalyst.com; The number one website for young investors.

Q: Mortgage rates?
I keep hearing that mortgage rates will probably hold steady until mid-2008. They've already increased from 6.15 to 6.75 in the past 6 weeks. I'm building a house, and won't be able to lock in a mortgage rate until probably mid-August. Should I "buy" my mortgage rate at 6.75% now for $750, or should I hold off? What are the odds that rates will top 7.25% within the next three months?

A: If you can lock at that rate right now for 750.00, my advise would be to do it. No one has a crystal ball, but rates show no signs of falling any time soon. As you stated previously, rates have risen by over .5% in the last couple months. Take the bird in the hand. It'll give you peace of mind.

Q: Why do mortgage rates keep going up after the Fed lowers their interest rate?
We're in the market for a house, and it would seem that the lowering Fed rate would trickle down to the mortgage business. Instead, those rates keep going UP! How do they expect people to help out the economy by buying homes when they keep making it so unattainable and unattractive?

A: Mortgage rates are not driven by fed rates. They are driven by the bond market, which competes with mortgage backed securities for capital. Investors need to buy the mortgages from the originators, and the rates are determined by their pricing models. As a previous poster noted, mortgage rates follow the 10 year treasury most closely. The spread between the 10 year and mortgage rates has been increasing due to increased fears of inflation (which the fed cuts make even worse) and the general perceived riskiness in the mortgage market (forclosure rate?). As such, investors are saying they'd rather invest in other securities because the rates are not paying them enough for the risk they are taking. That is why rates sometimes go up when the fed cuts.

Q: How does the unemployment rate affect mortgage rates?
from regression analysis I found that there is a strong positive relationship between the unemployment rate and mortgage rates. I can't figure out why. Any thoughts?

A: You need to be careful, mortgage rates are prospective rates and unemployment data is retrospective data. Data collected at time t may in fact reflect time t-1 and forward rates at time t+359. Further, the mortgage market has itself changed over time being deposit funded and insurance reserve funded twenty years ago and mutual fund owned today. That creates different owners with different liabilities. Finally, time series regressions are very difficult to do correctly. It is an entire field in itself. Unemployment is related to bond prices because higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices, so there should be a positive relationship with prices but a negative relation with rates. However, a mortgage could be thought of as 360 forward obligations and the current unemployment level does not reflect future beliefs about the economy in a direct manner. If you find a positive correlation that is very strong, there is also a possibility that you have a unit root problem and your t-tests are misspecified. The significance could be spurious. It partly depends upon whether the relationship is stationary or not. If you are running your tests using an ordinary statistics package, it is likely your correlation method is invalid.

Q: What affect will the government bailout have on future mortgage rates?
We are currently building a home and won't actually secure the financing until February or March of 2009. What is the likelihood mortgage rates will go down and by how much? We plan on locking in a rate, but don't want wait too long before they start going up.

A: You should be able to get a lock with a float down option. That is, you can protect yourself from rising rates by "capping" your rate. If rates are lower once the house is substantially complete, you can float down to the market 30-60 days prior to closing. No one can say what will happen with rates with any certainty except they will change. However, it stands to reason that the rates should get better because now the Fed is explicitly guaranteeing Freddie and Fannie obligations so the yields on those securities (which drive retail rates) should fall until they are approximately equally to Treasury securities of the same maturity. At present, there is a 1% difference in the yields. The markets should adjust until that spread is substantially reduced. Otherwise, a smart investor would prefer mortgage backed securities over Treasuries as they have a higher return with no additional risk. For some reason, the markets have not reacted fully to this change, but that may be because the bailout is still up in the air. Freddie and Fannie assets are not the toxic assets involved in the bailout generally speaking, but they have lost favor with Foreign investors in particular since the crisis began. In short, you may not need to worry about what will happen with rates provided your rate lock allows you the option to float down once the home is nearly complete. Good luck.

Q: Why are fixed mortgage rates and adjustable rates different?
I just saw that a 30 year fixed mortgage is 6.07% and a 5/1 ARM is 5.91%. What are the reasons why these rates differ by nearly .2%?

A: The 30 year fixed will have the same interest rate (6.07%) for all thirty years of the mortgage. The 5/1 ARM will only have a fixed rate 5 years, and then will change (can go up) in the sixth year and every year after until thirty years. The first mortgage is riskier for the bank because they are guaranteeing the rate for all thirty years, so they charge you a higher rate of interest.

Q: What is the deal with mortgage rates advertised on Yahoo Finance or Bankrate?
It seems that when I call to inquire about these good deals (for example, really low rates with 0 points), I am always told something like, "Well, that deal is for something else." How does one get an accurate mortgage quote online from these sites? Or is it impossible to get an accurate quote without calling the companies directly?

A: This is a example of how the lenders try to get the business from the people like you. They advertize low rate, but if you call them, this rate is not for you, because your credit is not good or you don't have enough equity or down payment. Every costumer is diferent and those low rates are reserved for the best costumers or they are not available now, because market change and rates go up ( sometimes they change 3 times a day). Please be carefull about applaing for the loan over the internet, because if you will put your info- you will be bombarded with emails and phone calls from diffrent lenders. My advice- call the local bank or broker to find out about rate for your situation and they will be more like to explain to you why this or that.

Q: How will tomorrow's suspected rate cut affect mortgage rates?
I'm on the verge of getting a mortgage and was curious how the rate cut would affect mortgage rates. Is it a direct relationship, like if my rate is 6% today and tomorrow they cut a half point, will tomorrow mortgage rate be 5.5%? I'm looking to do a 30 year fixed with about 50% down and excellent credit, any idea what kind of rate I should be looking to get? Any insight you can offer beofre I take the plunge would be great. Thanks.

A: The Fed rate is a short term bank loan rate. This does not directly affect Mortgage rates, but inflation does affect mortgage rates.

Q: How long til it is revealed in mortgage rates?
If the fed lowers interest rate 1/4 percent or possibly 1/2 percent this week as expected, how long til it is realized in mortgage rates? Thanks! I'm a little confused, but thanks for the answers! I did go to bankrate.com and their experts predict rates to fall further due to either the fed or lackluster employment numbers. Apparently, predicting mortgage rates is harder than ever. Cheers!

A: the discount rates have nothing to do with the mortgage rates. if the FED lowers the discount rate....it will stimulate the market to go up. When the market goes up....the bonds go down in Yield Spread. More investors buying stocks/mutual funds....leads to more consumer spending. to make a long story short...if the FED lowers the rate...the mortgages WILL go up.

Q: When the Fed cuts interest rates, how long does it take to reflect in mortgage offers?
I'm looking for mortgage rates online and want to build modular next year, now just looking for the best deal and wondering when today's Fed actions will be reflected in the offers I find.

A: Cuts in daily interest rates from the central bank to the commercial banks do not directly translate to mortgage rates if we are thinking of fixed rate long term mortgages. What drives mortgage rates is the long term rates for bonds and GICs. As banks have to pay less for funds from those sources they can cut long term mortgage rates. We can find examples of long term rates moving in exactly opposite directions compared to daily interest rates.

Q: Where can I find the best mortgage rates in Virginia online?
I am looking for an online mortgage lender thats does mortgages in Virginia Beach, VA. Who has the best rates?

A: I actually just got preapproved to purchase a new home with a pretty nice interest rate at http://www.virginiabeachvamortgage.com/ and they were very helpful. It is my first time purchasing a home. They also have a page where you can check the daily rates. My rate actually ended up being lower then the rate on that page though because I qualified for an FHA loan and I am a first time home buyer. Make sure to ask about FHA rates.

Q: How long will mortgage rates be low?
I wanted to save a little bit of money for a few months and buy a house before the end of August. Will the morgage rates still be as low as they are now in August 2008? Also what detemines if mortgage rates rise or fall?

A: Mortgage rates are going to be low for a long time. The economy is falling apart and keeping interest rates low is one of the few things that the government can do to help the economy. The Chairman of the Federal Reserve decides the rate of interest that is charged to banks. This influences the interest rates on home loans. Good question.

Q: Question about the Treasury Dept's efforts to freeze adjustable mortgage rates?
I do not understand why the Treasury Department has to step in to negotiate the freezing of mortgages rates. Why cant the banks/mortgage companies use their own discretion by doing it themselves? You would think it would make good business sense to freeze the rate and having a mortgagee continuing paying the mortgage than having the loan forclosed altogether... An explanation to why these companies are not already doing this would be helpful. Thanks.

A: Actually, none of the above are correct. The problem is a problem of timing, duty and risk. Imagine that there is a real estate market in equilibrium, but facing a block of foreclosures in addition to normal supply and demand relationships. The foreclosures will add supply but will not alter demand for purchased homes. The foreclosed may look for rental housing or move, but they will not look to purchase since they will not be eligible. Since this is a serial process dependent upon liquidity available and the public does not know the magnitude nor timing of the foreclosures, so prices will fall month after month. Therefore there is an incentive to be the first to foreclose since you will realize higher prices and lower losses on your loans. This has a potential to create a rush to foreclose causing everyone to lose who is holding debt, raising homelessness beyond the ability of communities to manage, and triggering losses for the FDIC and PBGC. Further, it is bad for elected officials in an election year. Also, ordinary homeowners could find their homes non-marketable or marketable at very low prices. This will cause people to be inflexible in looking for employment making the entire economy less efficient, making profits lower, making wages lower, putting more strain on the credit markets. Banks can use discretion, but each one individually must foreclose as quickly as possible unless an agreement can limit how much any one of them forecloses. A run to foreclose would be much like a run on the bank, everyone gets burned and no one gets what they want. If they can agree on a mechanism, they can go to shareholders with a good citizen stance, be able to fight the internal politics and if it is enforceable protect themselves from one another. Cheating is in everyone's interest so protection from cheating is very important. Rate freezes only make sense if the Treasury can promise low rates, which would be the same as promising high inflation. This will cause the mortgages to be worth less in a real sense, but profitable in the nominal sense. Bondholders will get hurt, potentially alot, but the banks will be fine, the homeowners will be hurt less than otherwise and the politicians will get re-elected.

Q: Why do 30 year mortgage rates continue to rise, while the fed continues to lower the fed funds rate?
It seems as though when money is more readily available, the 30 yr mortgage rates should drop.

A: the fed rate you're refering to is the rate for overnight borrowing to what is in the industry referred to as window loans - loans that keep the banks liquid amounts where the government requires. funding for mortgages, which are long term by nature, comes from investors. there are still too many nervous people hessitant to invest in mortgages again. so basically, these two pools of money come from different sources and while one might be inclined to think they should move the same direction, there is nothing that really ties them together.

Q: How are mortgage interest rates determined?
What I mean by that is I assume there is a formula which banks use to figure out what mortgage rates to offer a customer based on prime rates, customers credit history, size of mortgage, etc... Does anyone know how this process works and the specific formula/methodology used? thanks in advance!

A: Rates are determined by investors in the secondary market. Most loans are originated for sale to Fannie and Freddie so they rates that anyone can offer depends on what Fannie and Freddie can afford to offer on a program (e.g. 30 year, 15 year, etc.) which in turn is driven by what their investors require for a return/yield on their money. The link below tells you what Fannies investors are requiring roughly. http://www.bloomberg.com/apps/quote?ticker=MTGEFNCL%3AIND Then the Fannie/Freddie have to add a spread to that in order to make any money. The link below would represent a "par" rate based on delivery dates for various Freddie programs: http://ww3.freddiemac.com/ds1/sell/sffrny.nsf/frmDisplayRNY?OpenForm Then, a lender either has to charge fees or offer a slightly higher rate in order to make any money. Today, we were offering 6.875% with closing costs of $350 in our market. Of course this conversation does not address the delievery fees required by the agency programs based on credit scores, loan to value, transaction type and occupancy. These delivery fees will add to the closing costs or increase the rate or both if the delivery fees cannot be covered by increasing the rate. Home equity and portfolio programs are priced by individual banks and there is no single methodology or formula. If they are lending there own money, they can price there programs how ever they like. There is a similar secondary market for government programs, Ginniemae, which operates a lot the same as the secondary market created by Fannie and Freddie. The big difference is that these are owner occupied programs and there are not as many delivery fees as with the Fannie and Freddie programs. I hope I have helped to illuminate the subject without over complicating things.

Q: Does my mortgage rate go down if interest rates are cut?
Sorry to ask the shocking stupid question! I am coming to the end of my mortgage term ( end of September) and am wandering if the mortgage rates will go down (currently for at 6.99%). Do you think it will go down by this time? I am in the UK.

A: If your rate was artificially low, it will go up even if rates in general go down. Otherwise it will follow the market. /