This blog is provided by John Lynch of PRG Funding.
Class is in session! Mortgage 101…this isn’t pass fail either. What in the world is going on with mortgage rates? How does this effect the Raleigh Real Estate Market?
Why are rates so up and down? It is The President? The Economy? Is it Inflation? The Subprime melt down?
Well the answer could be yes to all? But the truth is that rates are stimulated by a number of reasons, and you are one of those reasons.
Mortgages come from many sources, including banks and brokerages, but most come from investors through what is communally known as the "capital markets." These markets are where investors interested in purchasing bonds come to buy these items.
In order to attract investors, the bond sells people must compete and they do this by offering different products with different risks and return over given periods of time. These bonds compete with other investments, US Treasuries, corporate bonds, foreign bonds, and others.
These investors are people like us that want low payments on debt and high returns on investments. You or your investment advisor will only buy so many low yielding bonds whether it is mortgages or some other bonds. It’s almost like shopping for who has the best interest on a savings account. The banks compete according to their needs. Banks that want more deposit growth offer higher yielding savings accounts…..
The demand plays a considerable role in the markets yields because there are so many options where we can invest. If demand falls….how best to attract them back? Raise the rates and investors come back. If course, it's not as simple as that but mortgage market makers serve not one client, but two: investors, who want the highest possible return on their investments, and the homeowner or homebuyer, who wants the lowest possible interest rate. In chorus, rates need to be high enough to attract investors but low enough to attract borrowers. .
As interest rates decline, investment customers can become more or less interested, depending upon the direction of economic growth, inflation, appetite for the given product, and several other factors. Characteristically though, the lower those rates get, the fewer investors are interested. Next week we will look at the Fed. Rates and it’s impact on rates.
Information courtesy of Sigma Research