Mortgage Rates
The Evolution of Mortgages and Mortgage Backed Securities
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Thirty years ago, it would have been difficult for the average investor to invest in mortgage-back securities, but with the explosion of mortgage-backed securities, almost anyone can now invest in a portfolio of mortgage loans, and these securities have become a major component of the fixed-income market.
Until the 1970s almost all home mortgages were written for a long term maturity, with a fixed mortgage rate over the life of the loan, and with equal fixed monthly payments. These "conventional mortgages" are still the most popular but a diverse set of alternative mortgage designs has developed.
Fixed rate mortgages have posed difficulties to lenders in years of increasing interest rates, because banks and institutions traditionally issued deposits and held long term mortgages, they suffered losses when interest rates increased as they had to pay out more on their deposit accounts but mortgage rates remained the same. The adjustable-rate mortgage was a response to this interest rate risk. These mortgages require the buyer to pay a mortgage rate which varies somewhat with the current market interest rate. Usually, the contract sets a limit, or cap on the maximum size a mortgage rate can change within a year and over the life of the contract. The adjusted rate contract shifts much of the rick of fluctuations in interest rates from the lender to the borrower. |
Mortgage Rates – What does the future hold?
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With mortgage rates at record all-time lows, there is only one direction for mortgage rates to go and that is up, the question is, how long will it be until the Federal Reserve starts to increase interest rates which will have a direct impact of when mortgage rates begin to rise. The central bank has kept interest rates close to zero since December 2008 and expanded its balance sheet by buying $2.3 trillion in bonds. This has resulted in three years of all-time low mortgage rates.
Key factors in determining whether interest rates will be adjusted by the Federal Reserve are GDP growth, unemployment rates and inflation rates. GDP growth continues to improve in the US and unemployment rates continue to decline in the US with the unemployment rate closing in on 8%. Federal Reserve Chairman, Ben Bernanke has set a 2% inflation rate goal for the US economy and has gone on record in being committed to keeping interest rates low for a longer time than initially expected. What this suggests is that mortgage rates will not see a material increase until at least 2013. As a home buyer or someone looking to re-finance their home, the next 12 to 24months is a great time to do so as mortgage rates can not go much lower than 10 basis points. |
Mortgage Rates – What Causes Mortgage Rates to Move Up and Down
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The main cause of mortgage rates moving up or down is a result of the Federal Reserve's decision to increase or decrease interest rates. In order to determine why mortgage rates move up and down we need to look at the key factors that influence the Federal Reserve's decision to change interest rates. Unfortunately there are millions of factors which contribute to the Federal reserve's decision to change interest rates, however we have attempted to identify the key factors that impact the Federal Reserve's decision to change interest rates which as a direct impact on mortgage rates.
The three key factors are to maintain GDP growth, to keep unemployment rates at a minimum and to limit inflation. All three of these factors have a direct impact on mortgage rates. This can be demonstrated in recent times when the US economies GDP growth was drastically reduced, unemployment rates sky rocketed and inflation bounced around with the price of real estate and commodities such as oil. The impact on mortgage rates was that the Federal Reserve had to cut interest rates to record lows in order to try and stimulate the economy and improve GDP which would indirectly create jobs and improve the unemployment rate. In cutting interest rates to record lows, mortgage rates have also reached record lows |
Mortgages and Mortgage rates – Open Mortgage Versus Variable Mortgage
| An open mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages are available in shorter terms and mortgage rates are typically is higher than mortgage rates associated with closed mortgages by as much as 1%, or more. They are normally chosen if you are thinking of selling your home, or if you are expecting to pay off the entire mortgage. A closed mortgage offers the security of fixed payments for terms from 6 months to 10 years. The associated mortgage rates are considerably lower than mortgage rates associated with an open mortgage. Most lenders offer as much as 20% prepayment of the original principal, and if one wanted to pay the mortgage out in full, prior to the maturity, a penalty would be charged. The penalty is usually 3 months interest, or the mortgage rates differential. |
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