Originally posted on January 10, 2013
There’s no crystal ball to tell how or when interest rates may change in the coming months. But here’s a realistic look at what affects them and how to put it all in perspective.
While the new year comes with lots of resolutions and predictions, I’ve never been one to make many of either. Resolutions are often quickly broken and predictions have as much chance of being right as they do wrong…
By far, the question I get asked most often is, “Where are interest rates going?” My usual answer is, “Good question!”
Honestly, no one knows exactly what interest rates will do nor can they foresee a change in advance. We can make a lot of educated guesses, but they are no more than that.
There’s often a lot of confusion as to how interest rates are set. Contrary to what you sometimes hear on the news, the government doesn’t “set” interest rates. The Federal Reserve sets the Federal Funds rate (a.k.a. the discount rate), which is the rate at which banks borrow from the government. They are very short-term rates, directly impacting equity lines, auto loans and credit cards. They do not directly affect mortgage rates, though. In fact, sometimes when the Fed increases the Federal Funds rate, mortgage rates drop.
Mortgage rates are directly tied to Mortgage Backed Securities or mortgage bonds, but they are often mistakenly thought to move in step with the 10-year Treasury Note. Not only do they not always trend in the same direction, but sometimes have an inverse relationship.
In the most simplistic terms, there are many economic factors that affect mortgage rates, but bad economic news coupled with tame inflation keep mortgage interest rates low.
Right now, rates are artificially low due to the Quantitative Easing (QE) actions of the Federal Reserve. The Fed is currently buying $85 billion in mortgage back securities each month. This QE activity has kept rates at today’s historical lows.
Mortgage rates move in “real time” just as stocks do; both are subject to change at any given time while the market is open. While it would be great to purchase a stock at rock bottom and then sell at its peak, no one can predict those circumstances. The same holds true for mortgage interest rates. A few days after I locked the interest rate for my own home, rates fell .25%. That’s just how the market works. But far too often, clients focus so much on interest rates that they lose sight of the big picture.
The truth is, there are multiple factors that contribute to locking in a good mortgage. Yes, interest rates are one of them, but many other considerations play an important role, too.
That’s why it’s critical to work with a trusted mortgage banker who takes the time to learn about your financial and living circumstances, and offers advice based on where you’re at now and what your plans are for the years ahead.
So here’s my best advice regarding today’s interest rates, which are as low as I’ve seen them: Try not to obsess over their micro-movements. Take the time to find a mortgage that works for you on all fronts, and is one you’re comfortable paying. Then shut out the media and move on with the things that matter to you most, like your home and family. To me, that’s the real big picture, and that’s what’s most important.
Happy New Year!