Can someone pls explain Mortgage Rates for me

Like most interest rates for loans they are tied to an Index. The Index can be anything and is detailed in the promissory note itself. Then a set percentage rate is added to that Index to give the actual interest rate. They are reset on a set schedule laid out in the promissory note as well. This can be daily, weekly, monthly, quarterly, bi-annually, annually, or more. The promissory not will also define the interest rate you should be looking for. For instance the price of 90 day T-bills as quoted in the 1st 3rd quarter issue of the New York Times.

The Index itself is usually initially determined by credit score and down payment.

Hi All:

Would you all pls dummy it down for me. Pls enlighten me as to what makes mortgage interest rates go up (or down)...

Thx,
G

I am NOT a mortgage broker or banker...

But, as I understand it the rates are more closely tied to the 10 Yr. Treasury Note than to the Fed Rate or Prime Rate. Think of it as "long term" versus "short term" financing. Obviously supply & demand affect the current advertised rates as well; at least they do during normal market conditions. Yesterday the Fed cut the rate at which they loan short term money by a 1/2 point (they accomplish this by buying and selling government bonds - not by arbitrarily picking a number and issuing an edict, although that's the way it seems). This won't directly affect the mortgage rates, in fact they just went up, but it could indirectly affect the mortgage rates as money moves through the financial system and more credit is available to loan to home buyers (increasing supply against static demand).

I am NOT a mortgage broker or banker...

But, as I understand it the rates are more closely tied to the 10 Yr. Treasury Note than to the Fed Rate or Prime Rate. Think of it as "long term" versus "short term" financing. Obviously supply & demand affect the current advertised rates as well; at least they do during normal market conditions. Yesterday the Fed cut the rate at which they loan short term money by a 1/2 point (they accomplish this by buying and selling government bonds - not by arbitrarily picking a number and issuing an edict, although that's the way it seems). This won't directly affect the mortgage rates, in fact they just went up, but it could indirectly affect the mortgage rates as money moves through the financial system and more credit is available to loan to home buyers (increasing supply against static demand).

Very good, but I will elaborate if I may. The Fed funds rate and the discount rate, which the latter is the rate that was lowered on Wednesday, but many call it the Feds funds rate- The fed funds rate and the discount rate are two of the tools the Federal Reserve uses to set U.S. monetary policy. The fed funds rate is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans—usually overnight—to depository institutions.

Prime rate is impacted when the Feds lower rates, therefore, prime went down .50 pt. on Wednesday. This impacts home equity loans and credit cards.

The long term fixed rates are priced usually off the 10 year bond, depending on the yield curve. (15 and 30 yr fixed). In a normal market, the spread relationship between the treasury is about 1.70% give or take, however, based on supply and demand, this changes. Right now you will see a much higher spread because of lack of supply. Adustable mortgages- like the 3/1, 5/1, 7/1 ARMS - are priced off the shorter term securities.

Just because the Feds lower rates, this does not directly affect treasuries, as many people seem to believe. It's the reaction of the markets or belief that rates the Feds will lower or raise rates and how it will affect the economies that spur a rally or flight to safety to the bond market (when treasuries rally, yields drop, hence rates drop) or a selloff, then rates rise. For example- If the stock market takes a dive, then often you see investors buy treasuries for the guaranteed return.

for reference -

[ame]http://en.wikipedia.org/wiki/Yield_curve[/ame]
[ame]http://en.wikipedia.org/wiki/Prime_rate[/ame]
[ame]http://en.wikipedia.org/wiki/Discount_rate[/ame]
[ame]http://en.wikipedia.org/wiki/Fed_funds_rate[/ame]
[ame]http://en.wikipedia.org/wiki/Libor[/ame]

rates -

ten year note - http://finance.yahoo.com/q?d=t&s=%5Etnx
prime rates - http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html
libor rates - [ame]http://en.wikipedia.org/wiki/Libor[/ame]
mortgate rates - http://mortgage-x.com/general/average_rates.asp

The long term fixed rates are priced usually off the 10 year bond, depending on the yield curve. (15 and 30 yr fixed). In a normal market, the spread relationship between the treasury is about 1.70% give or take, however, based on supply and demand, this changes. Right now you will see a much higher spread because of lack of supply. Adustable mortgages- like the 3/1, 5/1, 7/1 ARMS - are priced off the shorter term securities.

Mango, would this explain why the current 10 year note is at 3.4% but BofA is currently offering a generic 30-year fixed at 6.75%? Is that the correct definition of the spread, the difference - 2.85%?

I think they use the same chicken in a cage that sets the airline fares to figure out mortgage rates - they just give the chicken Red Bull for the mortgages!

Mango, would this explain why the current 10 year note is at 3.4% but BofA is currently offering a generic 30-year fixed at 6.75%? Is that the correct definition of the spread, the difference - 2.85%?

Yes!

Very good, but I will elaborate if I may. The Fed funds rate and the discount rate, which the latter is the rate that was lowered on Wednesday, but many call it the Feds funds rate- The fed funds rate and the discount rate are two of the tools the Federal Reserve uses to set U.S. monetary policy. The fed funds rate is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans—usually overnight—to depository institutions.

Prime rate is impacted when the Feds lower rates, therefore, prime went down .50 pt. on Wednesday. This impacts home equity loans and credit cards.

The long term fixed rates are priced usually off the 10 year bond, depending on the yield curve. (15 and 30 yr fixed). In a normal market, the spread relationship between the treasury is about 1.70% give or take, however, based on supply and demand, this changes. Right now you will see a much higher spread because of lack of supply. Adustable mortgages- like the 3/1, 5/1, 7/1 ARMS - are priced off the shorter term securities.

Just because the Feds lower rates, this does not directly affect treasuries, as many people seem to believe. It's the reaction of the markets or belief that rates the Feds will lower or raise rates and how it will affect the economies that spur a rally or flight to safety to the bond market (when treasuries rally, yields drop, hence rates drop) or a selloff, then rates rise. For example- If the stock market takes a dive, then often you see investors buy treasuries for the guaranteed return.

I would assume that a less than $417,001 (conforming) loan's rate is also somewhat lower than it might naturally be because of, now explicit, gov't guarantees...perhaps?

Great fact and opinion. Thanks all.

I would assume that a less than $417,001 (conforming) loan's rate is also somewhat lower than it might naturally be because of, now explicit, gov't guarantees...perhaps?

Not necessarily. My mortgage friends and I have been scratching our heads on this one. Also, we saw some good rallies, but rates didn't come down nearly what we should have seen, given the market was up over 32/32 - 1 point. I can only assume that it's because money hasn't started trickling in from the Feds yet for the bailouts or inflationary pressures.

Depository institutions are required by the Federal Reserve to keep a certain amount of their deposits as required reserves, in the form of vault cash or as electronic funds in reserve accounts with the Fed. Over the course of each day, as banks pay out and receive funds, they may end up with more (or fewer) funds than they need to meet their reserve requirement target. Banks with excess funds typically lend them overnight to other banks that are short on funds, rather than leaving those funds in their non-interest bearing reserve accounts at the Fed or as idle vault cash.

Because of the Federal Reserve's reserve requirements, there is a limit on how much money a bank can lend, [ame="http://en.wikipedia.org/wiki/Reserve_requirement"]http://en.wikipedia.org/wiki/Reserve_req...[/ame]

So, to answer your question, based on everything spoken about above, that doesn't necessarily mean we will see a drop in rates because most likely the world markets will start gaining confidence and the treasuries rates will rise. The spread may thin, though. Hard to tell. My crystal ball is broken. ;-)

Not necessarily. My mortgage friends and I have been scratching our heads on this one. Also, we saw some good rallies, but rates didn't come down nearly what we should have seen, given the market was up over 1 point. I can only assume that it's because money hasn't started trickling in from the Feds yet for the bailouts.

Depository institutions are required by the Federal Reserve to keep a certain amount of their deposits as required reserves, in the form of vault cash or as electronic funds in reserve accounts with the Fed. Over the course of each day, as banks pay out and receive funds, they may end up with more (or fewer) funds than they need to meet their reserve requirement target. Banks with excess funds typically lend them overnight to other banks that are short on funds, rather than leaving those funds in their non-interest bearing reserve accounts at the Fed or as idle vault cash.

Because of the Federal Reserve's reserve requirements, there is a limit on how much money a bank can lend, http://en.wikipedia.org/wiki/Reserve_req...

So, to answer your question, based on everything spoken about above, that doesn't necessarily mean we will see a drop in rates because most likely the world markets will start gaining confidence and the treasuries rates will rise. The spread may thin, though. Hard to tell. My crystal ball is broken. ;-)

Geo, here is also a very good link about what moves mortgage rates. http://library.hsh.com/read_article-hsh.asp?row_id=85

My apogies for being unclear :wave:. I was more meaning that simply by existing and being obligated to buy mortgages, aren't Fannie and Freddie affecting the mortgage rates by creating a market where none might otherwise exist and thereby affecting rates? Similar to a market maker..I am not judging their existence just thinking. What's the rate difference on a $415,000 30 year fixed loan here and a $420,000 30 year fixed..and why would it be different?

My apogies for being unclear :wave:. I was more meaning that simply by existing and being obligated to buy mortgages, aren't Fannie and Freddie affecting the mortgage rates by creating a market where none might otherwise exist and thereby affecting rates? Similar to a market maker..I am not judging their existence just thinking. What's the rate difference on a $415,000 30 year fixed loan here and a $420,000 30 year fixed..and why would it be different?

According to wikipedia, since F&F can buy conforming loans but not jumbo loans, they make that market more liquid and hence more appealing to banks. Doesn't look like all this new legislation is doing much good though considering current rates.

[ame]http://en.wikipedia.org/wiki/Conforming_loan[/ame]

According to wikipedia, since F&F can buy conforming loans but not jumbo loans, they make that market more liquid and hence more appealing to banks. Doesn't look like all this new legislation is doing much good though considering current rates.

http://en.wikipedia.org/wiki/Conforming_loan

Don't you take that tone with me!

My apogies for being unclear :wave:. I was more meaning that simply by existing and being obligated to buy mortgages, aren't Fannie and Freddie affecting the mortgage rates by creating a market where none might otherwise exist and thereby affecting rates? Similar to a market maker..I am not judging their existence just thinking. What's the rate difference on a $415,000 30 year fixed loan here and a $420,000 30 year fixed..and why would it be different?

No, the existence of the agencies do not affect the Treasury market on a day to day basis, although an argument can be made that because they make the market more liquid, rates are lower. However, Fannie was established in 1938 -The Great Depression- and was backed by US Treasuries because the only types of mortgages people could get were 3 or 5 year amortizations with very large down payments. Then later they became stock holder owned but gov't regulated - making it a quasi govt. agency. once that happened, you now have a capitalistic organization due to shares held by the public. Banks sell loans to one another as well - if conforming- they use agency guidelines, so in essence, that market could have regulated itself if you think about it. There are also different types of loan programs, like Alt-A that established itself in the free market- originating from subprime- and were copied by the GSE's.

You could say Wall Street would be more likely to buy agency loans because they were approved and reviewed by the GSE's, but remember, the loans were underwritten by the Banks and mortgage Banks that sold them to the GSE's, they were competing agencies (Fannie and Freddie -and had slightly different guidelines) the agencies bought them if they met the criteria of automated underwriting. They were sold in bulk, so not every loan was seen in its entirety. Then once they hit Wall Street, they got sliced and diced again.

You raise a good question, because if you think about it, would the ratings agencies who rated the securities and the credit default swap companies who sold the insurance, would they have been more careful, or would govt. have stepped in if the GSE's did not exist and there was soley a free market?

According to wikipedia, since F&F can buy conforming loans but not jumbo loans, they make that market more liquid and hence more appealing to banks. Doesn't look like all this new legislation is doing much good though considering current rates.

http://en.wikipedia.org/wiki/Conforming_loan

Actually, at one point, Fannie, then Freddie later, had a pilot program where they bought jumbos from select Banks. Jumbo rates were always higher for a long time, then jumbo rates were very close to conforming for a while when the real estate market was booming. Then they jumped when the credit crisis occurred once again, considered riskier loans. On adjustable rate jumbo mortgages, many Banks used to put them in portfolios and some still do, that is why you have to shop the rate.

In view of what me know now, anyone singing the praises of Fannie, Freddie, or the rating agencies, should be ignored.

My apogies for being unclear :wave:. I was more meaning that simply by existing and being obligated to buy mortgages, aren't Fannie and Freddie affecting the mortgage rates by creating a market where none might otherwise exist and thereby affecting rates? Similar to a market maker..I am not judging their existence just thinking. What's the rate difference on a $415,000 30 year fixed loan here and a $420,000 30 year fixed..and why would it be different?

https://www.penfed.org/productsAndRates/mortgages/mortgageRatesListing.asp it's all the same here