HOW ARE MORTGAGE RATES DEFINED?
One of the most important aspects to successfully obtaining a mortgage is getting the best interest rate. For most homeowners, this means securing the lowest, fixed interest rate ( no negative amortization!).
Many homeowners rely on their bank or mortgage broker to secure their interest rate, often without researching mortgage lender rates or inquiring about how they move. Whether you're interested in rates or not, it's wise to get a better understanding of how mortgage rates move, and why.
After all, a change in rate of a mere .125% to .25% could mean thousands of dollars of savings each year!
Although there are a slew of different factors that affect interest rates, the movement of the 10-year Treasury bond yield is said to be the best indicator to determine whether mortgage rates will rise or fall.
Though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years, so the 10-year bond is a great bellwether to measure interest rate change. Treasuries are also backed by the "full faith and credit" of the United States, making them the benchmark for many other bonds as well.
Additionally, 10-year treasury bonds, also known as Intermediate Term Bonds, and long-term fixed mortgages, which are packaged into mortgage-backed securities (MBS), compete for the same investors because they are very similar financial instruments. However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as payment default and early repayment, and thus carry more risk and must be priced higher to compensate.
As a rule of thumb, bad economic news sends mortgage rates lower, while good economic news pushes mortgage rates higher.
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