As a mortgage advisor I am constantly studying the overall economy to see what is moving mortgage rates. Here is a quick tutorial of what is moving rates today. What may seem to be good news for the overall economy may not be good for rates. The meltdown last September put our economy in a tailspin which drove interest rates down down to unprecedented lows. Currently we are in a period of record low interest rates for a few reasons. One, the cost for banks to borrow from the Federal Reserve is at 0-.25% which is as low as the Fed can go without paying banks to take their money. Rates are also closely tied to bonds, the 10 year Treasury is a great benchmark to follow for mortgage rates. Today the 10 year T-note was in the range of 3.38% yield. Mortgage rates are a fixed income investment much like bonds are and their biggest enemy is inflation. If inflation is high like over 4% a year, it makes very little sense for investors to take a 3.38% annually return over 10 years. Their investment can even lose buying power, thus in order for bonds to sell in an inflationary environment yields must rise. Another enemy of rates is a booming stock market, when investors are making high yields often money from fixed income moves to more risky places such as equity markets to make higher profits.
Another major factor is the housing crisis prompted the Fed to create a program to increase liquidity in the mortgage market and make borrowing artificially more affordable. They initiated a 1.25 trillion dollar mortgage purchase campaign to eat up the excess supply of mortgages sold on the secondary market. They have spent close to 1 trillion to date in this buying spree to keep rates low and plan to wean off the program in Q1 of 2010. They have already began to scale back their purchases so as not to abruptly leave the market and raise rates overnight. Rates have inched higher of late due to the strength of the stock market and the scaled back in Fed purchases.
What does all this mean if you are looking to purchase or refinance in the next year? It means there is a lot of uncertainly about where rates may be next year. Who is going to provide liquidity to the secondary mortgage market? My advice if you have been on the fence and an interest rates over 6%, look at locking soon. If you are purchasing a home your purchase power is greatly increased with todays low rates vs when the market returns to a more normal state 6% or higher.
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