What Really Causes Mortgage Rates to Change?

Every homeowner considering a refinance or soon to be homeowner cares a great deal about where Las Vegas mortgage rates are, and where they are headed. If you are like most people, you watch the 10 year bond rate that you see posted everywhere, including CNBC. In reality, the 10 yr government bond or the Federal Funds rate have little to do with how mortgage rates are established on Las Vegas home loans.



What then, are mortgage rates tied to, and what causes them to move??? Mortgage rates are tied to MBS.



..that is, Fannie Mae Mortgage Backed Securities. As the price of various MBS changes, so do fixed rate mortgages. As the price increases, mortgage rates rates go down.



What affects the price of Fannie Mae MBS? Several things. Many of the same items that affect the 10 year bond including:



a) Expectations of future inflation
b) Movements in the stock market
c) Government purchases of Mortgage Backed Securities
d) Rick premium between 10 yr bond and Mortgage Backed Securities
e) Competition from the US Government deficits



Expectations of future inflation: When the markets anticipate higher inflation, to prevent erosion of value, they demand a higher return on longer term investments like 10 year bonds and Mortgage Backed Securities.



Movements in the stock market: When money flows into and out of the stock market, much of it comes from or goes into bonds and mortgage back securities. As demand changes, so does the pricing.



Government purchases of Mortgage Backed Securities: In 2009, the fed has agreed to purchase up to 1.5 trillion in mortgage backed securities in an effort to keep prices high & mortgage rates lower. In fact, even their multi billion dollar purchases have not had the effect of keeping rates under 5%, yet they have been effective in keeping them from approaching 6%.



In September of this year however, the program will end and mortgage rates may creep up as a result.



Risk premium between 10 yr bonds and mortgage backed securities: On a historical basis, MBS were often priced on average under 150 basis points (1.5%) above the 10 year bond. With the advent of the mortgage crisis, that mortgage risk premium has increased.



Competition from the US Government: When deficits are high, the government is competing for a limited supply of available funds.



When government debt is issued, it takes dollars out of the system that might otherwise be used to purchase MBS...and thus can put upward pressure on MBS. By knowing where rates are headed, you can save a great deal of money and know when to lock the rate on your Las Vegas Home Loan.