If you have been watching the interest rates on home loans for the past couple weeks, you have noticed that they are increasing. As a mortgage planner, I have been seeing changes and rates worsening literally as the day goes on. Here is why, but first a little background.
The fixed interest rates for home loans, for example the “30-year fixed,” are based on the Fannie Mae 30-year bond. To be very simplistic, a bond is a fairly stable (think secure) place to put your money, but does not “pay” high rates (think low risk = low rates and vice versa). Generally when the stock market is doing well, the bond funds will have to “entice” investors to invest in them, generally by paying a higher yield. The inverse is also true in that when the stock market is declining, investors often like the security of the bonds and do not require as high of yield because of the safety of the investment. That “yield”, as it moves up and down, is what moves the interest rates that you borrow at.
Here are a few reasons why we have seen the average mortgage rates increase by about 1/2 percent this week alone, even while the stock market has taken losses.
- September housing starts fell to 817,000, far below the consensus forecast of 870,000, and the lowest since 1991
- Building permits, another leading indicator, fell to 786,000. While a drop in new construction should lower the number of existing homes on the market and help stabilize home prices, it is a psychological issue since the industry is on pace to construct the lowest number of new homes since WWII.
Then, thank you to our government for your “bailout”, we have the law of unintended consequences. The government announced on Monday that it would inject capital into individual banks and guarantee their debt (once again, think security). Under normal circumstances, bank debt pays higher interest rates than debt backed by Fannie and Freddie Mac (the bonds), because Fannie and Freddie have implicit government backing (safety).
Here’s the catch, now that the bank debt and Fannie & Freddie’s debt is backed by the government and the bank debt pays a higher interest rate, where do you think the investors are going to go? Exactly!
Now Fannie and Freddie must offer higher interest rates to raise additional capital and they have to pass the cost of those higher rates along in the form of interest rates.
Hope this helps you understand how the system (usually) works, and explains why we are seeing higher rates now.
Right now, it is more important than ever to work with a Certified Mortgage Planning Specialist who understands what the market is doing and who can guide you through this mess. Since your home is probably the biggest investment you will make in your life, wouldn’t you be more comfortable with someone who has the specialized knowledge to guide you through the maze of issues that affect your loan decision? Using a CMPS doesn’t cost you money, it saves you money!
Scott
If you are ready to buy or sell a home, let’s talk! We offer conventional financing as well as FHA, VA, Rural Development (USDA) and more for buyers, and great financing options to help sell your home quicker and help you put more money in your pocket.
Credit challanged? We can help get you into your next home before you know it at a fair rate and low costs. Just ask how!
