When you’re looking for a home loan, it’s important to understand how mortgage rates work so you can get the best possible rate on your mortgage.
As you shop for a home and compare home loan interest rates, here are a few things you should keep in mind.
Market forces and mortgage rates today
Home mortgage rates regularly change due to market forces. In general, when interest rates are on the rise, you can expect to see mortgage loan rates increase as well.
Many experts and mortgage rate watchers like to use the 10-year Treasury yield as a quick and dirty way to get an idea of where home loan rates might be headed next. These rates are often influenced by what is happening in the stock market, economy, and how the Federal Reserve sets monetary policy.
But there’s a little more to it than that. If you really want to get into the nitty-gritty, look what’s happening with mortgage-backed securities.
What are mortgage-backed securities?
Mortgage-backed securities are a type of bond. These investments date back to the 1968 HUD Act, which created Ginnie Mae. In order to free up more money for banks to lend to potential homeowners, these investments were designed to move some of the loans off the lenders’ books.
In order to create mortgage-backed securities, home loans with similar interest rates are bundled together. Then a security is created. This security promises the same payments as the bundle of loans.
The security is actually a derivative. You aren’t truly investing in the loans themselves. Instead, the bond’s performance is based on the bundle of mortgages.
Bonds are a bit weird when it comes to price and yield. When the price goes up, the yield goes lower, and vice versa. If mortgage-backed securities are in high demand, the price goes up (just like any other security). When prices go up because more people want them, the yield goes lower.
On the other hand, when mortgage-backed securities aren’t in demand, the price goes lower and the yield goes higher. The higher yield is meant to attract more people.
But what about the Federal Reserve?
Monetary policy does have an impact on mortgage rates today. One of the ways the Federal Reserve controls demand is through what it calls open market operations.
Essentially, the Fed buys and sells government securities (like bonds). The Fed can increase the money supply, keeping rates low, by purchasing more securities. This can include mortgage-backed securities, as well as Treasury bonds and other investments. When the Fed is ready to tighten policy and restrict the money supply, it sells off some of its bonds.
The famed Fed Funds Rate isn’t actually a hard rate set by the Federal Reserve. Instead, the Fed announces its benchmark, and then engages in actions aimed at getting the rate to the desired level.
All of these actions influence, albeit indirectly, mortgage rates today.
Local mortgage rates and personal factors
Mortgage loan rates are also local and personal. Lenders across the country set their own rates. They are often close to each other, but they are also based, to some degree, on the local market.
You can get an idea of what to expect by looking at the national average rate, which is posted by Freddie Mac each week. Freddie Mac performs a survey of rates across the country for fixed-rate and adjustable-rate mortgages, and then publishes the averages. It’s a good place to start if you want to get a feel for home loan interest rates.
Don’t forget that personal factors play a role in your personal mortgage rate. Lenders look at your credit score, income, down payment amount, and the size of your home loan to decide what terms to offer you. Because rates can vary, it makes sense to shop around.
How much longer can we expect low home mortgage rates?
Right now, we are in an environment that is relatively low-rate. However, things are moving. There are expectations that mortgage rates will head higher in the coming months.
Even as mortgage loan rates are expected to rise, you might not be in bad shape. Historically, mortgage rates are still low, according to Freddie Mac. The 4.15% seen on the 30-year-fixed rate in January 2017 is higher than the 3.44% of August 2016, but that’s not too bad.
When I bought my home in September 2007, I paid a rate of 6.02% (the national average was 6.38%). The rate when my parents bought a home in 1992 was 7.92%. And none of the rates of the last 20 years can compare with 1981, when the annual average for mortgage interest rates was 16.63%.
Lock in your mortgage rate
Home loan interest rates are always changing. That’s why you want to lock in your rate when you can. Just after the election in November 2016, mortgage interest rates jumped. Many people looking to buy found themselves saddled with a higher rate practically overnight.
When you get a good rate, do what you can to lock it in. That way, if mortgage rates do head higher, you won’t get stuck. Some lenders also allow you to take advantage of falling rates. You won’t see a higher rate if you lock in, but you also have the chance to pay less in interest if rates drop.
In the end, mortgage rates today might not be the same rate tomorrow. Work on your credit so you are always in a position to take advantage of the best possible rate.