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How Bonds Affect Mortgage Rates

private lenders vancouver
private lenders vancouver

How Bonds Affect Mortgage Rates

Mortgage loan interest depends on a number of factors like down payment, credit score and the type of loan that you’ve taken. However, interestingly enough, there are a number of hidden factors that influence market interest rates; one of them being the bond market.

In this article, we bring to you information on how bonds rates influence mortgage rates and which type of mortgages are affected by the bond market.

What are mortgage rates and how are they set?

A mortgage rate is the percentage rate of interest charged on a loan to finance real estate, and they can be fixed or variable. With a fixed-rate mortgage, the rate is fixed for the entire repayment term, meaning the principal and interest (P&I) payments won’t change during the loan’s term. With a variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), the interest rate will adjust at set intervals (e.g., after five years and then annually with a 5/1 ARM). When the rate adjusts, the interest portion of the P&I payment will increase or decrease depending on the direction of the rate change.

Mortgage rates are typically set by lenders varying on factors as the loan’s repayment term, the property’s characteristics, the borrower’s creditworthiness, including credit score and debt-to-income ratio (DTI), as well as economic conditions and federal monetary policy.

Bond markets Vs mortgage rates

Bonds affect mortgage interest rates because they compete for the same type of investors, who are looking for a fixed and stable return in exchange for low risk. Bonds are long term and low risk investment products. While corporate bonds issued by companies are medium risk and return, treasury bonds issued by federal government offer much more security as they are low risk and are more preferred  by people.

Bond prices and mortgage interest rates are inversely proportional to each other, meaning that when bonds are more expensive, mortgage rates are lower and when bonds are less expensive, mortgage interest rates are higher.

Treasury bonds are similar to mortgage rates as far as term lengths are concerned – usually ranging from 10, 20 or 30 years drive market rates. Mortgage bonds however are subjected to higher risk as they depend on individual payment whereas treasury bonds are very safe due to the government backing. It is due to this fact that investors don’t wish for higher rates.

Banks and mortgage lenders keep their interest rates slightly higher than bonds as they attract similar investors, and the slightly higher rates are enough to push them towards mortgages. Both the bond investors and real estate investors want their investment to have collateral.

When bond interest rates go up, their prices drop and same is the case then with mortgage rates – they rise too. On the other hand, if the secondary bond market is strong and bond prices are high, it means that bond interest rates are low which in turn lowers mortgage interest rates too.

Usually, when interest rates rise, housing prices eventually fall.

Which mortgages are affected by bonds?

The fact is that not all types of mortgages are affected by treasury bond yields. Bond prices only influence fixed rate mortgage loans. The 10-year note affects 15-year conventional mortgage loans while the 30-year bond affects 30-year loans. When Treasury rates rise, so do rates on these mortgages. Banks know they can raise rates once their primary competitors do.

This is however not applicable to adjustable-rate mortgage loans as for that, you need to consider the most recent interest rate decision offered by the Federal government and mortgage lenders only peg fixed interest rates to bond rates. Thus, you pay less for your mortgage loan if the Federal Reserve decides to cut interest rates on the federal loans available to banks and if federal rates go up, you’ll pay more.

It may not be in your hands to control how the bond market moves but what is possible is that – you can choose which mortgage lender you want to work with. Some tips that you could follow:

  1. Compare different lenders and take a look at all of your interest rate options before you choose which company you want to work with.
  2. Choose a lender with a solid reputation and affordable rates.
  3. Take the help of your mortgage lender’s customer service team and personal policies in managing your loan. Their expertise will be beneficial in keeping your loan rates unaffected by bond movements.

Now, that you know – bond prices only affect fixed rate mortgage loans, your lender choice becomes easier. Remember – Decisions made by the Federal Reserve affect the prices of ARM loans. Therefore, your lender choice is much more influential when it comes to picking the best mortgage loan than bond or Reserve rates.

Take the most crucial step towards the right mortgage, today!

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