interest rates Archives - Teton Realty Blog

How are Mortgage Interest Rates Determined?

September 26, 2022 By Tayson Rockefeller Leave a Comment

If you read the same news articles I do, they are filled with terms like basis point increases by the Fed (the Federal Reserve), the MBS market, inflation, treasury bond yields, blah, blah, blah. What does it all mean, and how does it affect mortgage interest rates?

Disclaimer: I didn’t even get through college, like hardly. Take this with a grain of salt, but I had to try to make sense of this in my own mind, and wanted to share that journey with you.

Micro
In the loan world, interest rates are affected by a number of internal factors. These include whether the loan is a government loan (ie FHA, VA or USDA), if it’s a primary home mortgage (people tend to default less with respect to their primary home), the equity or down payment amount, credit scores and property types.

Macro
From 30,000 feet, there’s a lot more going on. This is where you’re going to hear about “the Fed”, Treasury Bonds and the MBS Market, aka the Mortgage Backed Securities market.

The Fed
The Federal Reserve does not set mortgage interest rates. However, and despite a number of direct factors that determine mortgage interest rates, there is a strong correlation between the two when comparing the Federal Reserve’s rates with mortgage interest rates. The Federal Reserve meets about every 6 weeks to look at economic factors, primarily making sure that prices are stable and inflation is low, as well as the strength of the jobs market. Their primary goal when adjusting rates is to control inflation. The Fed’s rate was lowered to almost zero at the beginning of the 2020 pandemic to stimulate the economy. Now, the Fed is reacting (as opposed to being proactive, another discussion) by raising the rate to make borrowing more expensive and therefore cooling down the economy by reducing spending and thus inflation. Regardless, the Fed’s rate will directly affect other consumer loans like auto loans and credit cards.

Treasury Bond Rates
Government bonds are usually considered very safe investments issued by and backed by the National government to support government spending. Mortgage rates are more closely tied to Treasury Bond rates (T-Bonds if ya want to sound cool), usually issued with a maturity date between 10 and 30 years. They pay interest to the investor until the bond matures. When bond interest rates are high, the bond is considered less valuable in the secondary market as it is paying out more in interest. This causes mortgage lenders to lower rates and vice versa. A bond’s yield refers to the return on investment for the purchaser of the bond.

(Unrelated), for those of you that want to go down this rabbit hole, here’s a quote from Investopedia on yield curves, something we talk about when predicting recessions;
A yield curve inverts when long-term interest rates drop below short-term rates, indicating that investors are moving money away from short-term bonds and into long-term ones. This suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future.

Mortgage-Backed Securities (MBS)
Mortgage-backed securities are kind of like a bond that is made up of a bundle of home loans. These pools of loans can be millions or even billions of dollars worth of home loans. Essentially, Local Bank sells your loan to>Larger Bank for the original cost of the loan, (so they can get their capital back to make more loans) and they usually make their profit with a small loan fee paid by the borrower. Larger Bank sells your loan and many others to>A Corporation (or more likely Fannie Mae or Freddie Mac) for a small portion of the interest paid by you, and the other loans. They then sell shares to shareholders for a small portion of the interest. The banks get their Capital back to make new loans and everyone makes money, assuming none of the loans are paid off and none default, but that’s built into the overall investment analysis for the shareholders. Anyway… As the demand for mortgage bonds increase, Fannie and Freddie can also demand a higher price with a lower yield to shareholders. As the demand decreases, they have to reduce the price and offer a larger yield. More simply, when MBS prices drop, lenders rise their interest rates to compensate. Inversely, the more MBSs investors buy, the lower the rates drop. Here again, the MBS market is largely influenced by The Fed raising rates.

Conclusion
So… How are mortgage interest rates determined in Teton Valley? (<— gotta add some SEO here) My best (and totally crude and heavily opinionated conclusion) is that they are influenced by the supply and demand of bonds like Treasury Bonds and Mortgage Backed Securities, which are in-turn influenced by the Federal Reserve and it’s rate, intended to keep the inflation rate in check, the housing market in check, and the jobs market in the best position possible.

Helpful Resources:
The Fed:
Here’s a great video explaining this process in more detail.
https://youtu.be/AkMsMDk_brU
MBS
Here’s the video from Concerning Reality that does a great job explaining mortgage-backed securities: https://youtu.be/feDw649zekw
And another from First Integrity Mortgage: https://youtu.be/JRvSDV-C33w
Treasury Bonds
Here’s another video, this one does a good job explaining Treasury Bonds.
https://youtu.be/P2tpRnDO_U0

Financing Options, Let’s Get Creative!

July 14, 2022 By Tayson Rockefeller Leave a Comment

Usual disclaimer: I am not a lender. Always verify information and available programs with your lender. I recently wrote an article similar to this one, but I’m going to try to use this article just to get down to brass tacks on financing options and ways to get creative to get the best rate, and to lock that rate in the event you are purchasing new construction and are in a holding pattern.

Rate Locks & Extended Rate Locks

Many people don’t realize that you can lock rates for an extended period of time. This is an excellent tool when purchasing real estate that is under construction. Lenders usually carry products to lock rates for 6, 9 or even 12 months. While these products may come with a slightly higher rate, they often have options to “float down” the rate in the event rates begin to decrease. This is the best of both worlds.

Temporary Buy Downs

Temporary buy Downs can be a great way to secure a loan for someone that might be pushing their limits in terms of a debt to income ratio, and need to get their payment a little lower for the first couple of years. This buy down can sometimes be negotiated with the seller to be paid at closing, and provides the buyer with a payment that is a little more manageable for the first two or three years.

Permanent Buy Downs

Nothing new with buying your interest rate down up front, but it is important to look at the payback depending on how long you intend to hold the loan. Typically a buying “point” (1% of the purchase price amount) will get you a 1/8% to 1/4% lower rate, but it’s always great to get a quote because sometimes a point can get you an even greater discount.

Adjustable Rate Mortgages An adjustable rate mortgage can be a scary thought, basically it’s fixed for a certain amount of time and can adjust up after the initial fixed rate period expires. However, below is an example of a comparison between a 10-1 adjustable rate mortgage and a 30-Yr fixed mortgage, roughly it today’s rates. Considering the average homeowner holds their mortgage or loan far less than 10 years, there’s quite a bit of protection as well as opportunity to refinance that loan during a decade long time span.

Interest Rates, Ideas for Buyers and Market Impacts

May 6, 2022 By Tayson Rockefeller Leave a Comment

It’s no secret, interest rates are definitely on the rise, and likely will continue to do so. It’s interesting hearing about all of the potential impacts. A lender friend of mine provided some good insight recently. Interest rates are still very low from a historical standpoint, and there are still some great ways to minimize the impacts of rising rates. These include mortgage points that come with a variety of options and the ability to have these points negotiated into a transaction or even paid by the seller. A mortgage point is effectively a way to buy down the interest rate up front. This can be a great tool to help buyers keep up with today’s real estate prices, which don’t seem to be going down despite interest rates creeping up. Buying mortgage points can also work well for buyers that intend to keep their loans long-term. Typically a “point” is equivalent to 1% of the purchase price and that will usually reduce the interest rate anywhere from 1/8 to 3/8 of a percent. Other options include a 2-1 (or even a 3-2-1) buy down which reduces the first year by 2 points in the second year by one point, which is where the highest amount of interest is paid on a loan while the principal of balance is still high.

Obviously interest increases are coming as a way to combat inflation, and it’s probably the lesser of two evils. Interestingly, supply chain issues, high building costs and other factors on the supply side are keeping new inventory at bay. Whereas real estate is primarily supply and demand based, this has created an interesting dynamic for both buyers and sellers. Personally, I do believe that the cumulative total of these issues will have an impact on the market, but without the increase of supply, I’m interested to see how much (if any, I should add).

Is it a good time to buy?

May 15, 2019 By Tayson Rockefeller Leave a Comment

Any good economist, salesperson, or real estate agent will always tell you up front; “I don’t have a crystal ball.” I don’t view this as a disclosure to cover one’s rear, but more a statement to get you thinking about both sides of an equation. With that, I don’t have a crystal ball, but I am going to do my best to make a recommendation.

Home prices continue to rise, the real estate market is booming, but these cycles don’t last forever. Even in times of recession, history shows us that markets recover, and thrive. I have to remind people that those who purchased a home in 2007 would very likely be in good shape today. We witnessed one of the deepest recessions in American history, yet here we are, 10 years later. If you would have purchased a home in 2007, your interest rate likely would have been somewhere between 6 and 7%. This seems high, but based on the past 50 years, it’s not bad. Sure, there are other equations. Those with an 18% interest rate in the early 80s could have refinanced over time. They also may have experienced a higher rate of appreciation.

Regardless, for the first time in history, rates have been below 5% for nearly 10 years, and this probably won’t last forever. The rate of inflation will likely increase as the strong economy continues, which will result in increasing interest rates to create balance for that rising inflation.

With that, I’m going to run a quick hypothetical. Let’s say you are buying a home and obtaining a loan for $400,000. The interest rates for a 30 year loan today are favorable, in the low 4% range. I’ll use 4.25%. The total cost of the loan, if you didn’t make any additional payments, would be about $708,000 over 30 years. Now, let’s say home values come down. You are able to buy the same home for $350,000 in a few years’ time, but interest rates are 6%. The total cost of the loan is $755,000 in this scenario.

To be fair, the above scenario isn’t totally realistic. Most people don’t own a home for the entire duration of their mortgage. I believe the median tenure living in a home is somewhere around 10 years. If we run the same scenario, and add up the payments over those 10 years, your balance owed at the end of 2030 with the first scenario would be around $300,000 and $280,000 in the second scenario. If you were to take into account the payments you would have made (as opposed to renting) between buying a house now, and if, and when the prices reduce in the future, you would likely be in the same boat. Things would also begin to swing in your favor the longer you own the home.

We don’t know if prices will decrease. We also don’t know if interest rates will rise. For all we know, home prices could come down along with interest rates, or home prices could increase along with interest rates. If trends continue, the latter is more likely to happen. If I run the same scenario with an increased purchase price and a higher interest rate, things get ugly.

We all have our own budget, limits on what we should spend, or even circumstances where it is not the right financial move to invest in a home. Do your best to weigh the pros AND cons. Educate yourself with respect to current interest rates, home prices and values. If it all adds up, then yes, it is my opinion that it is the right time to buy.

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