Interest Rates

What is a good Mortgage Rate and how do the Interest Rates fluctuate?

Most people think their home is the biggest purchase they will ever make, but in actuality, their mortgage is the biggest purchase they will make. Over it's term, you will probably pay more on the interest than than you paid for the house. Saving a few fractions of a point on your interest rate can save you a tremendous amount of money on your mortgage.

Mortgage interest rates have fluctuated greatly the past 20 years. As a general rule, when the economy is heating up and stock prices are rising, interest rates tend to follow upward. In turn, as the economy cools off, interest rates tend to drop. Today, rates are much lower than they were in the mid-1980's and 90's. Most financial experts are predicting a rise in interest rates within the next year or two.

Unfortunately, no one can know for certain whether rates will rise or fall in a period of time. Your banker or broker doesn't set the current rate you're charged. Most lenders sell their loans to FannieMae or FreddieMac, which in turn, dump these loans into what is called the secondary market.

The secondary market is where mortgage investors purchase loans that lenders make. These securities and portfolios get sold to mutual funds, Wall Street firms and other investors who trade them the same way they trade Treasury securities and other bonds. As a result of this business model, investors control setting mortgage interest rates.

When economic news may indicate the economy is heating up too quickly, Fed rates go up, to try to cool the economy. Investors then demand higher rates from their lenders. The only way for lenders to sell their loans in this market is to increase their yields they offer investors. This drives rates higher.

The same thing happens, but in the other direction, when it looks like the economy is slowing down. Investors start buying bonds because they figure the Fed will have to cut rates in the near future, in order to help stimulate the economy. If investors wait, they'll end up with lower-yielding bonds. Since investor demand is very strong, the lenders who control loan supply can offer lower yields to their customers. This creates lower interest rates for consumers.

An index is a financial instrument that the interest rate is related and adjusted to. The most common indexes are the LIBOR (London Interbank Offered Rate), 1-Year Treasury Security, Prime, 6-Month CD and the 11th District Cost of Funds (COFI). Each of these indexes move up or down based on conditions of the financial markets.

History of Interest Rates

Interest Rates vary dramatically from year to year. Current rates are near a 40-year low. This is a reason for the huge increase in the number of mortgage refinances that are being done this year.

Current Mortgage Interest Rates

Rates change on a daily basis. There are many types of different mortgages, each offering different rates. For example, the traditional 30-year mortgage involves a fixed interest rate that is a slightly higher than a 15-year mortgage. There are many alternative programs and payment plans in which can give a lower initial mortgage rate and change after a certain period of time. There are many different mortgages for all types of situations, each with a different mortgage rate.

In general, mortgage interest rates depend upon the economic climate and also on the type of mortgage that is involved.

Please contact me to get additional advice about what are the best rates right now, when you should refinance, what to keep in mind when getting your first mortgage or if you have any other questions.