What Makes Mortgage Rates Go Up and Down?

I get calls every day from people who ask me if current mortgage rates are going to go up or down. There seems to be general confusion about mortgage rates and this subject involves some complexity, so I’d like to provide as much clarity as I can. With that said, I must warn you that this is not a subject that can be easily understood for the casual homebuyer.  To fully grasp the concepts I’ve highlighted below would require a level of depth that is not suitable for this medium. At the very least, I hope you can at least come away with a high-level understanding of what factors typically impact mortgage rates.

First, no one can tell you with 100% certainty that rates will go up or down tomorrow, next week or a month from now. The mortgage market is a market that has two main competitors: U.S. treasury notes and corporate bonds. Investors who are looking for safe long-term gains typically look to these treasury notes, corporate bonds and mortgage backed securities. The treasury note has the biggest impact on the mortgage market, as the only thing investors see as more secure than a mortgage security is the U.S. government. This is largely due to the fact that the U.S. government guarantees treasury notes. Treasury notes are issued by the government to raise money for everything from war to building roads. The only concern is that these notes rarely yield high interest rates and have been hovering around 2-3% for some time.

Mortgage-backed securities (MBS) are secured through residences and yield a higher interest rate than treasury notes, making them more desirable to investors. A residential mortgage-backed security is constructed by either a government agency or by a non-agency investment-banking firm. These entities start by selling or controlling a large number of residential loans, which they then package together into a single pool of loans. Lastly, they will essentially sell bonds that are backed by these pools of loans.

Corporate bonds are the riskiest and are typically available when a company has limited cash flow and wants to generate funds quickly. Corporate bonds are issued when companies are trying to raise money for things like research, development, and/or expansion. They’ll issue bonds spanning time frames of 10 years, for example, and apply a higher interest rate of 5-10%--or more. It’s important to note that these bonds are only as good as the company that offers them. For example, General Motors has issued bonds with great returns in the past, while Enron issued bonds based on fraudulent accounting practices that ultimately led to the fall of the company, negatively impacting thousands of employees and investors.

It is this constant battle between the floor (U.S. treasury notes) and the ceiling (corporate bonds) that causes rates to rise and fall consistently. Understanding these core concepts is often just outside the grasp of the casual homebuyer, which is why I always recommend consulting your loan officer and/or financial advisor when it comes time to buy. They spent hundreds of hours in the classroom so that you don’t have to. Happy house hunting!

Cheers,

Matt Hodge // Mortgage Loan Originator at Results Mortgage