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The Mortgage Professor: Some questions about mortgage interest rates

Jack Guttentag, The Mortgage Professor on

Published in Home and Consumer News

Q: Why have mortgage interest rates been creeping up over the last few months?

A: Recent declines in unemployment to rock bottom levels and the accompanying increase in the inflation rate have induced the Federal Reserve to tighten credit in order to dampen further price increases. The process will continue until the emergence of the next recession, which is overdue.

Q: What interest rates predict the direction future mortgage interest rates will take?

A: Before the development of secondary mortgage markets, there was an answer to this question. Changes in mortgage rates lagged changes in corporate bond yields by anywhere from two to eight months.

Today, however, the mortgage market is so thoroughly integrated into the broader capital market that there are no leading indicators of mortgage rates. Mortgage rates and bond yields change together.

A large proportion of all mortgages are placed in pools against which mortgage-backed securities (MBSs) are issued. MBSs trade actively in the market and are considered close substitutes for bonds. Any change in bond yields, therefore, is transmitted instantly to the MBS market.

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Mortgage loan originators, in turn, base their rates primarily on yields in the MBS market. Originators usually post their rates at about 11 a.m. EST, after they see the opening yields on MBSs that morning.

Q: What are the legitimate and illegitimate reasons why Jones gets a lower mortgage rate than Smith?

A: The legitimate reasons are embedded in the rate sheets lenders produce daily for their loan officers. Assuming Jones and Smith deal with the same lender, these reasons include the following:

--Jones paid points -- an upfront charge -- to reduce his rate where Smith did not.

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