What Makes Mortgage Interest Rates Move and Who Should You Trust? (Part I)

Many a client has called my office in Pleasanton asking for me to guarantee that they will get the best mortgage interest rate – frankly, I can try but no one can ever guarantee the best rate.  First you must define the best rate – for the hour, for the day, for the week or for the year?  Rates move constantly and are not controlled by anyone but the investor of Mortgage Backed Securities (bonds or debt).  If the investor (en mass) buys MBS the price goes up and the yield (or your mortgage interest rate) goes down.  If something happens in the investment arena that is positive, typically investors will sell off MBS and buy some asset class investment and MBS prices will fall and therefore the yield goes up making mortgage interest rates rise.  Simple huh?

We all know that the news is changing constantly – the dollar is up or down, a major bank fails or is bailed out by the government, a new drug that will affect life expectancy comes on the market or congress introduces some new legislation that will affect the financial markets.  This is life and therefore this is what changes interest rates.  A negative change in the asset markets are likely to make investors more cautious and get out of assets and into the safety of the bond market – this causes again the bonds to go up and interest rates go down.  It is a big see-saw.

Fortunately there are predictors of the direction of rates.  Some come from the fundamentals of the market – “if this happens then that happens”.  Others come from technical analysis where “masterminds” measure each and every turn and compare it to history and give their “expert” opinion of the direction.  Both predictors are right some of the time and wrong other times.  There is nothing that will tell us for sure, lacking a crystal ball.  Your mortgage broker will be right some of the time when he advises you and wrong some of the time.

What we can do is employ the use of fundamentals and technical analysis to try to get our advice right “more of the time than the next guy”.  Many of us pay for the services of experts who advise us on direction.  We pay for the prognosticators to help us because we cannot do everything – in most situations we are either meeting with you or trying to find more “you’s” to meet with so we can spread our wisdom further to people who need help.  There is just not enough time in a day to do everything ourselves.

With all of that going on, the professional mortgage planner is your friend and debt planning partner.  He is constantly aware that he has to be better educated than the next guy so that when he gives you advice he has a better chance of being right.  When he is right, you bring him your business and talk about him with others that bring him more business.  Education and training are what bring you the best mortgage (debt) plan, not the guy who is nice to you and promises you the world on a silver platter or the television commercial enticing you with a rate that will get you to call the company (many times to find that is gone).   Finding the best mortgage planner is not going to guarantee the best rate but it will get you “right” more often than the one who is guessing and not using the professional tools available in the market.

Four questions you should be asking your mortgage planner before you hire him or her:

1) What are mortgage interest rates based on? (The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.  DO NOT work with a lender who has their eyes on the wrong indicators.)

2) What is the next Economic Report or event that could cause interest rate movement? (A professional lender will have this at their fingertips.

3) When Bernanke and the Fed “change rates”, what does this mean… and what impact does this have on mortgage interest rates? (The answer may surprise you.  When the Fed makes a move, they can change a rate called the “Fed Funds Rate” or “Discount Rate”.  These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like.  On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change.  This is due to the dynamics within the financial markets in response to inflation.   Inflation is the enemy of mortgage interest rates.

4) Do you have access to live, real time, mortgage bond quotes? (If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday’s newspaper, and probably not a professional with whom to entrust your home mortgage financing.  Would you work with a stockbroker who is only able to grab yesterday’s paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future?

Choose the advice and expertise of those who can answer these questions.  It will help you in the long run “get close to that best interest rate”.  Stay tuned for Part II

David Walden – Diversified Mortgage Group – 925-426-8383 ext. 26 – Pleasanton, CA