Mortgage rates: stocks and bonds and rates, oh my!

October 13th, 2010

You are considering a new home loan or refinance mortgage and it seems the mortgages rates are changing every day. Why? What causes mortgage rates to go up and down? Here is a brief primer for you to consider as you use on-line mortgage calculators to determine your new home purchasing power or mortgage refinance savings.

Investors chase returns

Simple economics state that when you invest money you want some type of return, either a regular payment in the form of interest or an increase in value of your investment. In some markets a positive investment is not losing money but keeping what you have. The axiom of buy low and sell high is universal, from a single teacher conscientiously saving for a new home or car to a multi-billion-dollar mutual fund.

Investors are constantly looking for the best return, not only today but also for what they think will occur in the future. Weighing risk, return and future expectations, investors decide if they want to invest in a short term investment or a longer term investment, and which opportunity gives them the best return on investment.

Fixed versus adjustable rates

You may be using the refinance calculator to determine if it is worthwhile to you to refinance your current Adjustable Rate Mortgage to a 30-year fixed-rate mortgage. Chances are if you do convert your ARM to a fixed-rate the mortgage rate and payment will go up due to the very low short-term rate on your ARM today. The challenge for you is deciding whether to increase your monthly mortgage payment today in order to fix that payment for the long term and a guaranteed payment in the future; protecting yourself against higher rates and payments in the future, or take the risk and maintain your ARM.

Investors have similar considerations. Higher risk and possible short-term returns on stocks, or lower risk and guaranteed return in the long term investing in bonds, or mortgages.

Using the refinance calculator you can see the cost differential today of converting your ARM to a fixed rate, as well as the difference in the future if you plug in a higher interest rate for your ARM payment. What is the right decision for you?

Mortgages as investments

Mortgage rates are determined by the Mortgage Backed Securities (MBS) markets. On these markets Fannie Mae, Freddie Mac and government mortgage securities, or bonds, are bought and sold. These securities compete for investors with stocks, government bonds and other non-government security issues. Investors decide to buy or sell MBS based on the length of the investment, the current return on the investment and whether they feel the economic and political situation in the future will lead to lower or higher interest rates.

As prices for MBS increase mortgage rates drop, and vice versa. A bad day in the MBS market in which prices drop means that interest rates are increasing. Our current low interest rates exist because investors, and the Federal Reserve and elected officials, feel the economy is in such a state that low rates must persist to spur growth and borrowing for such growth. Bad economic news increases this sentiment and investors will react by purchasing more MBS and bonds, driving the prices up and rates down.

On the other hand, positive economic news signifies growing strength in the economy and therefore higher rates in the future. Investors will sell their MBS holdings, causing prices to drop and rates to rise, and look elsewhere for their investments. Most likely this search begins and ends at the stock markets.

Teeter-tottering on Wall Street

Using a prequalification calculator you can see how a higher interest rate leads to a lower loan amount and sales price for which you are qualified, essentially a teeter-totter relationship with rates and prices. As interest rates go up your maximum purchase price goes down; as rates go down your maximum price goes up. The same relationship generally, not always but generally, exists between stocks and bonds (bonds include Mortgage Backed Securities and mortgage rates). As stock prices rise generally investors are selling bonds (dropping prices and raising rates) and investing in stocks; when bond prices rise (and rates drop) investors are typically selling stocks causing stock prices to drop, and buying bonds.

Mortgage rates change day to day, usually not dramatically but enough over a few days or week so that rates may go up or down as much as 0.125-0.500 percent from one week to the next. Watching the stock markets, and reading this site’s weekly economic update on Fridays, will help you determine if mortgage rates are rising, falling or stable. This is key information as you use mortgage calculators to determine your new home loan or refinance mortgage.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

Prequalification calculator tips and tricks

March 02nd, 2011

Are you paid weekly or every other week? Is semi-monthly the same as bi-weekly? One of the most important duties performed by a...  Read More

Home price and sales data show weaker housing markets

February 28th, 2011

If you've been thinking 2011 is the year for you to purchase a new home you may be weighing whether to purchase before rates climb...  Read More

Trust yourself, trust your home

February 22nd, 2011

Every newspaper has a section where, if you are in it, you will not be able to read your name and the story. It is the obituary section. Reading...  Read More

Mortgage rates remain above 5 percent as consumer prices rise

February 18th, 2011

There is a relationship between prices you pay in the store and the rate on your new home loan or refinance mortgage. This week two key indexes on prices were...  Read More

0 Responses to "Mortgage rates: stocks and bonds and rates, oh my!"

No Comments

Leave a Comment