PLEASE TAKE THE TIME TO READ THIS – IT’S IMPORTANT TO YOUR MORTGAGE DECISION

Talk mortgages and you talk rates. Mortgage companies “tease” with them and neighbors brag about ‘em. What’s so surprising is most people don’t really know much about what makes rates “too good to be true” or why they change based on their personal circumstances. So, let’s break it down, because mortgage rates have a mystique of predictability in an unpredictable world.

I can’t express enough how uncomfortable it can be to quote interest rates to uninformed prospective mortgage borrowers, especially early in the mortgage search process. Until we have all the factors pulled together, know the best or most qualifying program, consider points/fees and are ready to lock – rates are just ballpark estimates. Sure, they are important. Everyone wants a great rate, but they are determined by qualifications, programs and the market – all of which can change by the minute. The bottom line here is – if you get quoted a rate by anyone, including The Home Team Mortgage, unless your rate is locked at the time of the quote, it can change at any time.

So, instead of listing a rate which may, or may not be available when YOU want a loan, let’s educate ourselves about mortgage rates and where they come from.

THE BASELINE FOR MORTGAGE RATES

First – let’s be clear that there is no magic formula or method to predict mortgage rates. However, there are three significant factors to consider and it’s important that you have a basic understanding of how rates are determined.

FACTOR #1: The 10-year Treasury Bond Rate* or Yield* is the major indicator of mortgage rate movement.

Why this vehicle? Because the average life of the 30-year mortgage is usually 10 years. Both the 10-year Treasury bond and long-term mortgages compete for the same investors

In general, you will see mortgage rates follow the yield trend of 10-year Treasury Bonds with an increased spread of 1.7% to 2.0% over the bond yield. This spread indicates that Mortgage Backed Securities are a bit riskier than the Bonds.

Why is this? The 10-year Treasury Bond is backed by the “full faith and credit” of the United States. Mortgages are not and therefore, subject to more risk.

Let’s talk about the risk, FACTOR #2. It’s a huge factor in today’s market!

Mortgage investors are happy as long as payments keep coming into their coffers. However, when homeowners default in their payments, investors get concerned, risk goes up and solutions are essential. The results are all too apparent in today’s housing market. Mortgage lenders have had to tighten their lending requirements to minimize risk. Underwriting guidelines are tougher, riskier loan programs disappeared and the credit history of the borrower is more important than ever. These changes came too late for many lenders. Especially ones with the riskier products like subprime lenders. Many have not survived.

When a government backed security, like the 10-year Treasury Bond is now contrasted with the Mortgage Backed Security, risk becomes a more influential player.

FACTOR #3 – Inflation basically means prices are likely to rise in the future. Logically speaking, if investors believe prices will rise in the future, then mortgage rates will rise as well. Inflation would weaken the future value of the fixed mortgage interest payments if no action was taken.

RATE VARIANCES BY YOUR LENDER

Now that you know the baseline of how mortgage rates are determined, did you know that your lender also has some flexibility? Rates can change by many factors, including: credit score - loan amount - amount of down payment applied - fixed, interest only or adjustable programs – prepayment penalties – refinance amount – cash out, and the list goes on.

Also, rates can be lowered by the borrower paying “points” or upfront fees to “buy it down.” I still get calls from people saying they are getting super low rates and wonder why I don’t offer the same. Well I do, but I typically don’t quote rates with multiple points being paid by the borrower. Is it always a bad thing? No – but you must be informed that you are paying the points and the impact they have! Unfortunately, way too many borrowers don’t discover the large fees until they become apparent at the closing table. Not good!

THE BOTTOM LINE

Take time to sit down with your mortgage professional and learn the details with, probably, the largest and most important financial decision you have. In this day of speed and convenience, don’t just assume that the “great rate” you see will actually be there for you.

* The yield on treasury bonds reflects the supply and demand of debt and interest rates long term – the return on investment. Yield is not to be confused with bond prices, which move in an inverse direction to mortgage rates.