Current Interest Rates
The mortgage market is a dynamic market and is a reflection of the Bond Market activities. Mortgages are long term debt, and therefore depend on the actions of bond traders to derive current market rates. Bond traders (usually big Wall Street Banks) as well as Fannie Mae and Freddie Mac, basically lend money to mortgage companies and banks in the form of a "warehouse line of credit."
The mortgage companies, mortgage banks and credit unions take these lines of credit and extend financing for mortgages. A mortgage is in and of itself a bond. This bond is then "securitized" or sold on the secondary market (back to a one of the big Wall Street Banks or Fannie Mae or Freddie Mac), thus replenishing the originating mortgage company's warehouse line of credit. Wall Street slices and dices these mortgages bundling them into CDO's (collateralized debt obligations) or giant bond funds and then sells them to foreign central banks, hedge funds, private equity firms, pension funds, insurance funds, etc. Because these Institutional Banks play such a pivotal role in the mortgage process, the trading of such enormous capital essentially sets the market rates.
A lot of people talk about the Prime Interest rate and the Discount rate, which is manipulated by the Federal Reserve. Yes, we've seen a lot of recent activity from the Federal Reserve lately especially them lowering the Discount rate seven times in a row. But, neither of these benchmarks affects mortgage rates directly. The Prime Interest rate and the Discount rate impact short term rates (credit cards, home equity lines of credit and auto loans). Mortgage rates are more impacted by the inflation index.
Mortgage rates loosely follow the 10 Year Treasury Bond index not perfectly, but the Treasuries and mortgage rates tend to move in the same direction. Mortgage rates are approximately 2% higher than the treasury rates. To get an idea of mortgage rates, where they've been and possibly where they're headedtake a look at the 10 year Treasury bond chart. And also, watch the important economic indicators, such as the inflation index, (CPI index) and the Dollar.
Although mortgage loans are still at relatively historically low rates, there is evidence that points to an upward trend in the coming years. Rates have steadily increased over the last nine months. And the high price of oil, factored in with a low dollar makes it likely that inflation will continue to rise for the foreseeable future. When inflation rises, so do mortgage rates.
