What Impacts Mortgage Interest Rates?
Trying to understand mortgage interest rates and what causes them to move can be difficult, but you’ve come to the right place. The Dallas Mortgage Planners team at First Choice Loan Services, Inc. understands the markets and indicators that cause interest rates to fluctuate. The ability to identify these factors gives our clients an edge to get a competitive interest rate.
The first step to understanding interest rate movement is to understand the relationship between mortgage backed securities and mortgage interest rates. Mortgage backed securities (MBS) are a type of bond issued to the market, made up of a group of similar mortgage loans with a specific rate and term. These MBS are primarily issued by Fannie Mae and Freddie Mac and are bought and sold just like a stock. The difference being that investors purchasing MBS are getting a specific fixed rate of return for their investment (roughly equal to your mortgage interest rate). MBS have an exact indirect correlation to interest rates, meaning as the price of MBS goes up from investor buying, the yield/interest rate goes down. At the same note, as investors sell MBS, the price goes down, causing the yield/rate to go up.
So the market factors that drive the trading of bonds and mortgage backed securities directly impacts the mortgage interest rates? Exactly.
Ok, so then what causes the MBS to move? There are three main components that drive interest rates and MBS: the global economy, inflation, and Fed policy. These are some of the same indicators that directly impact the prices in the stock market. The difference being that when good news comes out surrounding the market(s) and economy, investors gain confidence and start shifting investments into the stock and equity markets. This is great news for stock prices. The downside of these confidence boosters from economic reports is that the funds needed to invest in stocks will come at the expense of bonds.
Pop quiz – What happens when MBS are sold and stocks rally? That’s right. MBS prices go down and the yield/interest rates go up. To summarize, good news in our national and global markets increases confidence, stocks go up, and interest rates go up. On the other hand, as the markets show signs of fear and uncertainty, investors lose confidence, sell their risky stocks, and move funds into the safe haven of a fixed rate of return like MBS and other bonds. The yield or rate of return from those bonds then gets lowered due to the higher demand…interest rates go down.
Understanding how these mortgage backed securities gives you the tools to be able to identify when the market is moving and even why it’s moving. If you’d like more info, we’d love the opportunity to speak with you. Always feel free to call us at 972-499-0454 or contact us directly.