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How do mortgage rates work with the fed funds rate?
- Thread starter mshheaddoc
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Because mortgage rates are more closely tied to the value of mortgage bonds and not the federal funds rate. Mortgage bonds are riskier investments nowadays, and there are no buyers at low rates.
Basically, what a lender (usually) does is bundles their mortgages into bonds (there are different asset classes for different mortgages, etc) and sells these bonds on the open market. Nowadays, no one wants to buy these securities, so, in order to sell them, the yield (controlled by the interest rate) must be higher.
Basically, what a lender (usually) does is bundles their mortgages into bonds (there are different asset classes for different mortgages, etc) and sells these bonds on the open market. Nowadays, no one wants to buy these securities, so, in order to sell them, the yield (controlled by the interest rate) must be higher.
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Sol's right. No one believes the short term rates that the fed can actually control will stay down nearly as long as most people will take out a mortgage anyway.
I mean, short term interest rates are below the current level of inflation. That won't last long.
I also find it interesting that despite ST rates dropping from 5.25 to 2.00 over the last 2 years since I got my mortgage, mortgage rates are slightly higher now than they were then, even for non-sub-prime borrowers.
I'm a little envious of those who refinanced around 2004 with a 30 year fixed mortgage around 5%.
I mean, short term interest rates are below the current level of inflation. That won't last long.
I also find it interesting that despite ST rates dropping from 5.25 to 2.00 over the last 2 years since I got my mortgage, mortgage rates are slightly higher now than they were then, even for non-sub-prime borrowers.
I'm a little envious of those who refinanced around 2004 with a 30 year fixed mortgage around 5%.
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Sol, you're right... here's a little more info from something I posted on here a while back:
1) What are mortgage interest rates based on? (The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.)
2) What is the next Economic Report or event that could cause interest rate movement? (A professional lender will have this at their fingertips).
3) When Bernanke and the Fed "change rates", what does this mean… and what impact does this have on mortgage interest rates? (The answer may surprise you. When the Fed makes a move, they can change a rate called the "Fed Funds Rate" or "Discount Rate". These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation.
1) What are mortgage interest rates based on? (The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.)
2) What is the next Economic Report or event that could cause interest rate movement? (A professional lender will have this at their fingertips).
3) When Bernanke and the Fed "change rates", what does this mean… and what impact does this have on mortgage interest rates? (The answer may surprise you. When the Fed makes a move, they can change a rate called the "Fed Funds Rate" or "Discount Rate". These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation.
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Maybe I'm wrong, but I thought mortgage rates were actually determined by the libor rate. For some reason I recall reading that a long time ago.
