If you’re in the market to purchase a home but have been sitting on the fence waiting for the “perfect” one, you may want to hop off soon. Interest rates have been creeping up lately (as have the prices of homes for sale on the Central Coast) and all that is going to affect your pocketbook.
For example, if you were to buy a $500,000 single-family owner-occupied home, a 30-year fixed loan at today’s interest rate of 4.25% will mean a monthly mortgage payment of $1967.76. Two months ago, when the interest rate was 3.5%, the monthly payment for the same price purchase was $1,796.18.
We all know the anxiety and stress this “rate gambling” can cause and I intend to give you some insight and knowledge that will ease stress and create a comfortable decision process. It is important to understand how your mortgage rate itself is determined and what will affect its fluctuation in the market. With this information it’s easier to make a secure and educated decision on when is the right time to act.
What influences rising interest rates?
The best way to answer that question is to start with some other questions:
- Where does your money goes after you make your payment?
- Who gets the money from my interest payment?
- Who is profiting from this transaction every month?
Is it your servicer, the bank, maybe even the lending officer? No….
The answer is your loan investor.
All mortgage loan are sold on the secondary market in the form of mortgage backed securities. These securities are low risk investment vehicles that typically yield a slightly higher rate than US Treasury Bonds, as to appeal to investors looking for a conservative option on the market. This creates a direct link between US Treasury bonds rates and Mortgage rates. Hence, when US bond rates go up then mortgage securities follow suit seeing as how they have a higher risk and yield a higher return. The same goes to be said if US Treasury Bond rates go down.
With this being addressed our next question is “How do we make the US Treasury rates go down?” As with most things in the economy the price is determined by the “supply and demand” concept.
For example: When there is a shortage of milk in the market, the price of milk goes up and the dairyman yields more profit or return. When there is a larger supply of milk introduced to the market, the price of milk drops and the dairyman makes less.
This is the concept that was used and has been keeping mortgage rates down recently. The plan is referred to as Quantitative easing and allowed the government to buy large quantities of US Treasury bonds, in essence controlling the supply and keeping the rate down. These dealings with the US treasury bond advertently lowered rates for mortgage consumers and pushed investors to seek low risk investing opportunities other then the US treasury bonds.
Recent Changes in the Market
Now that we know who is receiving the benefits our interest payments and what can dictate the fluctuation, let’s look at what has recently occurred in the market. According to USA Today on June 02, 2013, it seems that the government will be tapering back on the purchase of US bonds earlier than the original stated year of 2014. This created a higher rate of return on US Treasury Bonds and in essence mortgage backed securities. This increase of rate is then passed onto us, the consumer. Based on this information we can assume that unless the US Treasury bond rate of return drops drastically we cannot anticipate any new the dip in the rate. If anything prepare ourselves for the continuous increase to come.
Knowing that this gradual increase is coming to mortgage rates and comparing them to the overall rates of the past, now more than ever it is important to lock in the rate and find the home at an affordable rate. Rates are still low and home values are increasing, if you are debating and don’t know where to start as always I suggest with questions! Thank you for your time and until next time…
For more information about current interest rates and mortgage loan options, call Sarah Bradley from Wells Fargo Mortgage in Pismo, Beach, CA