Calculating Monthly Payments
Let’s take a basic tour of how rates are determined.
Interest Rate or APR?
Mortgage interest rates come in eighths of a point. That means the interest rates between three and four percent generally look like this:
Rates generally follow this formula of moving up or down by 0.125 percentage points.
However, you may have seen ads for 3.36% and 3.99% which don’t follow the pattern. In the case of the loan ads, what you’re seeing is the lender’s annual percentage rate (APR). That’s your interest rate with discount points, closing costs, origination fees, and other costs also factored in.
Stocks, Bonds, and Securities
There’s a type of government bond called the 10-year Treasury bond which investors consider a safe, medium-term investment. Fixed-rate, 30-year mortgages are often packaged up and sold on to a secondary market as mortgage-backed securities (MBS). The same investors might also buy these. Even though the mortgages are 30-year loans, the average loan gets paid off (when a home is re-sold) or refinanced within about 10 years. That makes these bonds and mortgage-backed securities similar financial products that compete in the same market.
Because of this similarity and because there’s a strong correlation between 10-year Treasury bond yields and mortgage interest rates, experts monitor both.
The economy has a pretty sizable impact on both bonds and mortgages rates. Reports on home sales, employment, consumer confidence, and more, give insight into the health of the economy and can easily send rates up or down depending on the news. When the economy isn’t doing so well, investors tend to sell their stocks and look for safer investments, like 10-year Treasury bonds. When these bonds get bought up, their prices may increase but the yield (investment return) goes down which impacts mortgage rates.
When the economy improves, investors increase the purchase of stocks, so bond interest and prices go down (and yields increase) which increases mortgage rates.
Other Forces That Influence Your Rate
Of course, there are a number of other factors that heavily influence your interest rate. Supply and demand, timing, and pricing adjustments can all have a big impact.
The key to remember is that mortgage rates are closely linked to a number of other parts of the economy. If economic data starts shifting, interest rates won’t be far behind.