Wednesday, December 2, 2015

What Causes Interest Rates to Move Up or Down?

You've heard everyone saying that interest rates are near historic lows. How did they get there? Why are they going to go back up eventually? Your Lake of the Ozarks mortgage lender is here to explain what causes interest rates to move up  or down. The interest rate you're offered is an important piece of the Lake of the Ozarks home loan process.

How Mortgage Rates Work

Mortgage rates move up or down in eighths of a percentage. For example, if you don't have an even 4%,  you will be offered something like 4.125%, 4.25%, 4.375%, 4.5%, 4.625%, 4.75%, or 4.875%. A change of a mere .125% may not seem very big, but it could mean thousands of dollars in savings or costs annually. When you see rates advertised with a different percentage, something like 4.86%, that is actually the APR which factors in the cost of obtaining the loan. Another thing to think about with advertised rates, is that they are an average of rates and will not be the exact rate that you'll receive.

How Mortgage Rates are Determined

While many different factors can affect interest rates, the best indicator of whether mortgage rates will rise or fall is said to be the movement of the 10-yr Treasury Bond yield. While most mortgages are originally financed as 30-yr mortgages, most homeowners either pay them off or refinance them in around 10 years. This is why the 10-yr Treasury Bond is a great measure of the interest rate change. In addition, Treasuries are backed by the "full faith and credit" of the US, and therefore are the benchmark for many other bonds as well. To get an idea of where mortgage rates will be based on the 10-yr Treasury bond, use a spread of about 1.70% above the current 10-yr bond yield. The spread accounts for the increased risk associated with a mortgage vs. a bond. This spread can change and should only be used as a way to ballpark where interest rates currently are. For specific details on current interest rates, please contact your mortgage lender at Lake of the Ozarks.

Factors that Cause Mortgage Rates to Move

Typically, when bond rates (or bond yield) go up, the interest rate also goes up. However, you don't want to confuse the bond rate with bond prices, as they have an inverse relationship with interest rates. Let's take a look at a few other factors contributing to the rise and fall of interest rates:

1. Economic Outlook - When the economic outlook is poor, investors turn to bonds as a safe investment. When purchases of bonds increase, the associated yield falls and so do mortgage rates. However, when the economy is expected to do well, investors will place their money in stocks, causing bond prices to decrease and interest rates to rise.

2. Economic Activity - Economic activity including jobs reports, Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on the economic calendar can move mortgage rates significantly.

3. Federal Funds Rate - If the Federal Funds Rate changes, mortgage rates can swing up or down depending on what their report indicates about the economy. 

4. Inflation - If inflation fears are strong, interest rates will rise to curb the money supply, but when there is little risk of inflation, mortgage rates will most likely fall.

While the 10-yr Treasury bond is the best indicator of where interest rates are going, they don't always match up. There have been times and will be more times, where mortgage rates rise faster than the bond yield. Just because the bond yield rises 20 basis points, doesn't mean that mortgage rates will do the same. In addition, these rates are only averages and your unique situation will be the biggest factor in what rates are offered to you. The best thing to do is talk to your mortgage lender to see what options you have for a mortgage at the Lake of the Ozarks. Lakelender Michael Lasson will discuss your options and offer competitive interest rates, backing it up with the first class service you deserve - call 573-746-7211 today! 

For Lake area news, resources and tips on financial services, please 

Michael Lasson
Sr. Residential Mortgage Lender
NMLS #: 493712

2265 Bagnell Dam Blvd, Suite B
PO Box 1449
Lake Ozark, MO 65049

Direct:  (573) 746-7211


**The postings on this site are my own and do not necessarily represent First State Bank of St Charles’s positions, strategies, or opinions.

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