Rates are at all-time lows which is causing previous home buyers to refinance and current home buyers to rejoice. Interest rates can be a bit complicated, so I wanted to offer up some information to those who are curious as to what drives mortgage interest rate pricing and why rates are currently so low.
What determines mortgage rates?
Mortgage rates are closely linked with the bond markets(most notably the 10 Year Treasury Bond) which are dictated by a number of economic factors.
Bonds are an investment securities for individuals, banks and other institutions that pay out a guaranteed annual yield as opposed many other types of available investments(such as stocks and equities) which have the potential for much higher payouts. In a healthy economy there is less demand for low-yielding bonds, and this puts upward pressure on bond payouts – most importantly in the form of Mortgage Backed Securities(MBS). The US has an open market for MBS’s and is this ‘secondary market’ creates an environment where the originating, purchasing and servicing of these notes allow US consumers to obtain market interest rates on mortgages from participating lenders. If most individuals/institutions can get significant in their other investment outlets outside of bonds, this will decrease the appetite for lower yielding MBS’s and put upward pressure on interest rates. At this point you should think of your mortgage as a bond, and the market will dictate bond pricing depending on what is happening elsewhere in the US and Global Economy. Since Intercoastal is one of the largest independent lenders in our region, we are able originate, fund and service loans very competitively based on what is happening in the secondary market.
Higher interest rates are not always a bad thing. If mortgage interest rates are higher, it means that other aspects of the economy will be helping your other investments/portfolio. For instance, if mortgage rates are higher, it is likely that there are plentiful options in our economy for investments that are safely offering a higher return. There is always balance in our economy and the status of mortgage interest rates is a perfect example. Some folks root for lower mortgage rates, however there is likely an adverse effect which doesn’t always mean we should be hoping that mortgage interest rates plummet.
“Higher interest rates are not always a bad thing. If mortgage interest rates are higher, it means that other aspects of the economy will be helping your other investments/portfolio.”
Why are mortgage rates so low right now?
Since the beginning of the pandemic, interest rates have dropped considerably – even lower than where they were before the pandemic started. The reason is that the Federal Reserve has stepped in and has been buying droves of bonds in the form of MBS’s and US Treasuries. This is one of the tools that they use in an effort to inject money into a struggling economy. As soon as they decide to taper back you will see that rates will soon again rise as there becomes less competition for the lower yielding bonds with the Fed out of the equation. They are likely to do so when the economy is showing that it can again operate in a healthy manner without COVID restrictions and has forecasted to happen moving into 2022
What should I do?
Take advantage.
Rates are cyclical and only bound to go up from here – we are still sitting right around all-time lows stemmed from the pandemic. Securing an interest while rates are low – whether you are purchasing or refinancing from a previous purchase – will save you considerably. If you are able to secure a low interest rate while rates are down, you may be savings hundreds more per month than those who are securing an interest rate years from now where they are spending 1.00% or even 2.00% more annually on their interest expense. This can result in tens of thousands in savings over a seemingly short number of years and also put you in a better equity position in your home.
It always makes sense to at least get a quote to look at what your monthly and yearly savings might look like.