Can someone pls explain Mortgage Rates for me

[Geo]

Hi All:

Would you all pls dummy it down for me. Pls enlighten me as to what makes mortgage interest rates go up (or down)...

Thx,
G

 

[Matt J]

Like most interest rates for loans they are tied to an Index. The Index can be anything and is detailed in the promissory note itself. Then a set percentage rate is added to that Index to give the actual interest rate. They are reset on a set schedule laid out in the promissory note as well. This can be daily, weekly, monthly, quarterly, bi-annually, annually, or more. The promissory not will also define the interest rate you should be looking for. For instance the price of 90 day T-bills as quoted in the 1st 3rd quarter issue of the New York Times.

 

[Matt J]

The Index itself is usually initially determined by credit score and down payment.

 

[30abob]

Hi All:

Would you all pls dummy it down for me. Pls enlighten me as to what makes mortgage interest rates go up (or down)...

Thx,
G

I am NOT a mortgage broker or banker...

But, as I understand it the rates are more closely tied to the 10 Yr. Treasury Note than to the Fed Rate or Prime Rate. Think of it as "long term" versus "short term" financing. Obviously supply & demand affect the current advertised rates as well; at least they do during normal market conditions. Yesterday the Fed cut the rate at which they loan short term money by a 1/2 point (they accomplish this by buying and selling government bonds - not by arbitrarily picking a number and issuing an edict, although that's the way it seems). This won't directly affect the mortgage rates, in fact they just went up, but it could indirectly affect the mortgage rates as money moves through the financial system and more credit is available to loan to home buyers (increasing supply against static demand).

 

[Mango]

I am NOT a mortgage broker or banker...

But, as I understand it the rates are more closely tied to the 10 Yr. Treasury Note than to the Fed Rate or Prime Rate. Think of it as "long term" versus "short term" financing. Obviously supply & demand affect the current advertised rates as well; at least they do during normal market conditions. Yesterday the Fed cut the rate at which they loan short term money by a 1/2 point (they accomplish this by buying and selling government bonds - not by arbitrarily picking a number and issuing an edict, although that's the way it seems). This won't directly affect the mortgage rates, in fact they just went up, but it could indirectly affect the mortgage rates as money moves through the financial system and more credit is available to loan to home buyers (increasing supply against static demand).

Very good, but I will elaborate if I may. The Fed funds rate and the discount rate, which the latter is the rate that was lowered on Wednesday, but many call it the Feds funds rate- The fed funds rate and the discount rate are two of the tools the Federal Reserve uses to set U.S. monetary policy. The fed funds rate is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans—usually overnight—to depository institutions.

Prime rate is impacted when the Feds lower rates, therefore, prime went down .50 pt. on Wednesday. This impacts home equity loans and credit cards.

The long term fixed rates are priced usually off the 10 year bond, depending on the yield curve. (15 and 30 yr fixed). In a normal market, the spread relationship between the treasury is about 1.70% give or take, however, based on supply and demand, this changes. Right now you will see a much higher spread because of lack of supply. Adustable mortgages- like the 3/1, 5/1, 7/1 ARMS - are priced off the shorter term securities.

Just because the Feds lower rates, this does not directly affect treasuries, as many people seem to believe. It's the reaction of the markets or belief that rates the Feds will lower or raise rates and how it will affect the economies that spur a rally or flight to safety to the bond market (when treasuries rally, yields drop, hence rates drop) or a selloff, then rates rise. For example- If the stock market takes a dive, then often you see investors buy treasuries for the guaranteed return.

 

[30ashopper]

for reference -

[ame]http://en.wikipedia.org/wiki/Yield_curve[/ame]
[ame]http://en.wikipedia.org/wiki/Prime_rate[/ame]
[ame]http://en.wikipedia.org/wiki/Discount_rate[/ame]
[ame]http://en.wikipedia.org/wiki/Fed_funds_rate[/ame]
[ame]http://en.wikipedia.org/wiki/Libor[/ame]

rates -

ten year note - http://finance.yahoo.com/q?d=t&s=%5Etnx
prime rates - http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html
libor rates - [ame]http://en.wikipedia.org/wiki/Libor[/ame]
mortgate rates - http://mortgage-x.com/general/average_rates.asp

 

[30ashopper]

The long term fixed rates are priced usually off the 10 year bond, depending on the yield curve. (15 and 30 yr fixed). In a normal market, the spread relationship between the treasury is about 1.70% give or take, however, based on supply and demand, this changes. Right now you will see a much higher spread because of lack of supply. Adustable mortgages- like the 3/1, 5/1, 7/1 ARMS - are priced off the shorter term securities.

Mango, would this explain why the current 10 year note is at 3.4% but BofA is currently offering a generic 30-year fixed at 6.75%? Is that the correct definition of the spread, the difference - 2.85%?

 

[scooterbug44]

I think they use the same chicken in a cage that sets the airline fares to figure out mortgage rates - they just give the chicken Red Bull for the mortgages!

 

[Mango]

Mango, would this explain why the current 10 year note is at 3.4% but BofA is currently offering a generic 30-year fixed at 6.75%? Is that the correct definition of the spread, the difference - 2.85%?

Yes!

 

[elgordoboy]

Very good, but I will elaborate if I may. The Fed funds rate and the discount rate, which the latter is the rate that was lowered on Wednesday, but many call it the Feds funds rate- The fed funds rate and the discount rate are two of the tools the Federal Reserve uses to set U.S. monetary policy. The fed funds rate is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans—usually overnight—to depository institutions.

Prime rate is impacted when the Feds lower rates, therefore, prime went down .50 pt. on Wednesday. This impacts home equity loans and credit cards.

The long term fixed rates are priced usually off the 10 year bond, depending on the yield curve. (15 and 30 yr fixed). In a normal market, the spread relationship between the treasury is about 1.70% give or take, however, based on supply and demand, this changes. Right now you will see a much higher spread because of lack of supply. Adustable mortgages- like the 3/1, 5/1, 7/1 ARMS - are priced off the shorter term securities.

Just because the Feds lower rates, this does not directly affect treasuries, as many people seem to believe. It's the reaction of the markets or belief that rates the Feds will lower or raise rates and how it will affect the economies that spur a rally or flight to safety to the bond market (when treasuries rally, yields drop, hence rates drop) or a selloff, then rates rise. For example- If the stock market takes a dive, then often you see investors buy treasuries for the guaranteed return.

I would assume that a less than $417,001 (conforming) loan's rate is also somewhat lower than it might naturally be because of, now explicit, gov't guarantees...perhaps?