What Everyone Ought To Know About Changing Mortgage Rates
September 10th, 2007 - Categories: Basics of Dothan Real Estate, Buying a home in the Dothan area, Financing
By: Charles Woodall
http://www.dothanhomesearch.com
We as real estate professionals are asked all the time about the relationship between what is called the?Federal Funds?Rate (fed rate for short), and mortgage rates. The most common?question is “I heard on the news that the government lowered the fed rate, so will mortgage rates come down?” To answer that question, we first need to look at how and by whom each of these rates is determined.
The?Federal Runds?Rate is the interest rate the Federal Reserve Banks charge depository institutions on overnight loans.?The fed rate?is an administered rate, set by the Federal Reserve Banks, rather than a market rate of interest. The fed rate acts as the gas pedal for?our economy. Lowering?this rate?is like hitting the gas, giving the economy a boost by putting more money in. Raising the fed rate is akin to pressing the brakes on the economy; doing so tightens the supply of money making it harder to borrow.
Mortgage rates?are a market-determined interest rate for long-term residential mortgage loans. Mortgage rates are competive rates, set individually by mortgage lenders, and are based on the demand for mortgage-backed securities.?Because there are so many factors that can effect mortgage rates, such as unemployment, the stock market, inflation, etc., the public perception of the economy can be the leading cause of a change in rates. As a general rule, watch the various economic data. If the data shows hesitancy and confusion, mortgage rates may fall. Conversely, if the data shows strength and low unemployment, rates may rise.
Since?they?are governed by market forces and not controlled by the government like the fed rate, is there anything we can?watch to guage where mortgage rates will go? Yes, in fact there is. Watching the movement of the 10-year Treasury bond is a great way to get an idea of where mortgage rates are heading. Historically, mortgage rates have followed the movement of these treasury bonds.
What’s the bottom line? A change in a short-term interest rate such as the fed rate may not affect rates on long-term interest rates such as mortgages directly. However, along with many other economic factors, the fed rate does play some small role in determining what interest rate you will get when you buy your new home in Dothan.