Mortgage rates: they change constantly, they determine how much you’ll pay every month, and you’re seemingly at their whim. They’re also, to the average home buyer, a great mystery.
However, they’re not as arbitrary as they might seem—there’s no council of mortgage-makers randomly choosing what the rate will be that week. They are determined by a number of factors, and while it’s quite complicated, here’s a way to better understand them, which can also help you better understand why certain times are especially good to secure a loan or refinance the one you have. Understanding rates can actually save you thousands of dollars.
The Treasury Bond
We said it before, but it bears repeating—mortgage rates are determined by many factors. However, the 10-year treasury bond yield is the most significant contributing factor; most mortgages are refinanced (or paid off) within ten years, which is why the 10-year bond has such an impact.
While there are differences between treasury bonds and mortgages—namely, treasuries are guaranteed to be paid back—they are financially similar; one way is that they compete for the same investors.
So while it’s not set in stone, typically if bond rates rise, so too will mortgage rates, and vice versa.
The major factors involved in the country’s overall economic activity also affect mortgage rates. These include consumer confidence, employment, home sales, the Consumer Price Index, and more. If the economic factors are negative, investors typically sell stocks and buy bonds, which brings about lower bond and mortgage rates. So in general, a better economy leads to higher rates.
This means you. While overall rates are determined by the above factors, and many others (including timing and the supply of mortgage-backed securities), you are the biggest determining factor in your rate. The higher the credit score, down payment, and assets, the better the rate. So while it’s useful to understand and follow the big-picture when it comes to mortgage rates, the only thing that’s truly in your hands is your financial situation. The sooner you get it in order, the better chance you have of obtaining the lowest available rate.
If you’re buying or selling a home in the Boston area and are in need of a mortgage or refinance, or have any mortgage-related questions, contact me right away for advice and help.