MORTGAGE INTEREST RATES ARE GREAT TODAY. BUT WHAT ABOUT TOMORROW?
Let's face it, mortgage interest rates have been averaging in the low 5% range, and that is great for the real estate market. But do you know where mortgage interest rates come from and why they change?
Lenders don't just make up rates! Long-term interest rates are based on Mortgage Backed Securities, also known as Mortgage Bonds. As money flows in and out of the bond market, the bond "yield" changes and the corresponding interest rate goes up or down.
May people think the 10-year Treasury Note is the correct index to "follow rates" with. While this note usually trends in he same directs as Mortgage Bonds, it is not unusual to see them move in completely opposite diretions. Be careful not to work with a Loan Officer who has their eyes on the wrong indicators.
This is a bit simplistic, but you can look at Fannie Mae and Freddie Mac as a clearing house which "buys" loans from lenders based upon rules they make, then package those loans into Mortgage Bonds, which the public buys on the bond market.
With everything going on in the mortgage world, bond players ramped DOWN the purchase of Mortgage Backed Securities. If no one buys Mortgage Bonds, there is no money for Fannie and Freddie to buy loans from lenders. If lenders can't sell the notes, they run out of money, the supply dries up, and consumers can no longer get a mortgage loan.
With no confidence in the mortgage market, bond players simply stopped buying mortgage back securities, creating a huge liquidity problem in 2007 and 2008.
In order to calm, and ease the strain on the markets, the US Treasury Department started buying up to $1.25 trillion worth of Mortgage Backed Securities which would help keep money flowing to the mortgage markets. By spring 2009, the Treasury Department was buying 2/3rds of all mortgage bonds, which has kept 30-year fixed mortgage rates artificially low.
The overall mortgage bond market has started to improve, and confidence is starting to return because "new loans" are being written to more traditional safer and strictor guidelines. Traditional private sector bond players have started to again purchase mortgage bonds, which is good, as the money pledged by the Treasury to buy bonds in expected to run out over the next few months.
Once the Treasury Department stops buying bonds, all bets are off as to what interest rates will do. If the private market continues to increase their rate of buying bonds, interest rates should continue to stay low, or increase slightly. If the private-sector doesn't carry the load, expect to see mortgage interest rates climb.
While it is too early to know exactly what is going to happen, but if you are on the fence about buying a new home or refinancing an existing home, I'd suggest you take advantage of today's mortgage interest rates RIGHT NOW.