What Goes Up...Must Come Down

If you watch the news or are current in the mortgage world (as we all should be), you know that the mortgage rates are dropping significantly. Mortgage rates are important because they regulate the amount of interest that home buyers pay on their mortgages every month. Houses, especially nice ones, aren’t exactly cheap. So borrowers need to obtain a loan from a bank in order to pay for their house. Well upon paying back that loan, borrowers must also pay interest, so if the interest rates are low, then of course the payments (in most circumstances) are low as well. What does that mean for you? It means that NOW is the time to look into buying a new home, or refinancing your current home for a lower interest rate.

According to Freddie Mac, the average mortgage rate as of October 16, 2014 is at 3.97% for a 30 Year Fixed Rate Mortgage. That’s a major change from the 4.28 percentage rate that was reported last year by Freddie Mac. One of the safest bonds to invest in are US Treasury Bonds. Because of this, US Banks model their interest rates on mortgages based on the US Treasury’s rates. As a result, if the Treasury’s rates drop, then the mortgage rates are likely to follow.

Is There an Explanation for Low Mortgage Rates?

Wise investors want to make safe investments that will provide a steady income of money. One investment that is considered “safe” is an investment in Mortgage-Backed Securities (or MBS). Those who invest in mortgage-backed securities are essentially lending their money to a homebuyer or a business. These MBSs are backed by government supported entities like Freddie Mac and Fannie Mae, and since they are supported by the full faith and credit of the government, investors feel comfortable with investing. Investors are investing while the mortgage rates are low. If they go up too high, there is no guarantee that they will continue to put money towards MBSs. Banks need people to continue to invest in MBSs so that they can continue to gather their loans and sell them to the GSEs, or Government-Sponsored Enterprise . If no one is investing then the banks can’t sell their loans, and if smaller banks can’t sell their loans and their borrowers default then the bank loses thousands of dollars. According to Jed Kolko, a Trulia Chief Economist, “[When] investors think US mortgage-backed securities are relatively safe, mortgage rates [will] stay low.”

Granted, what I have provided is only one explanation. Other bloggers, mortgage experts, and financial institutions I’m sure have their opinions on why the rates have fallen. Will the rates stay low? Doubt it. The economy is constantly changing as well as the demand to borrow money. So be sure to take advantage of this rare financial opportunity while it’s beneficial to you. Just a bit of food for your mortgage thoughts.