For Buyers and Sellers

What Are Mortgage Rates Doing?

Oregon First, RealtorsĀ® & Washington First Properties

The average 30-year-fixed rate mortgage dropped to 3.09% during the week ending Nov. 4, down from 3.14% the week prior, according to the latest Freddie Mac PMMS Mortgage Survey. A year ago, the 30-year fixed-rate mortgage averaged 2.78%.

Most economists believe mortgage rates will climb following as the Federal Reserve tightens monetary policy. The central bank’s Federal Open Markets Committee announced on Wednesday that it will begin to taper its monthly asset purchases starting in November.

“While mortgage rates fell after several weeks on the rise, we expect future upticks due to stronger economic data and as the Federal Reserve pulls back on its stimulus,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

To put current rates in perspective, the 30 year fixed rate in 2010 was 4.69% and ten years before that, it was 8.05%. If we go all the way back to 1981, the rate was a whopping 16.63%! Be aware, however, that the exact rate you pay will be a function of where the property is, how much it is, how much you're putting down, what your credit score is, and the type of loan you're getting.

But what causes rates to move up or down? The short answer is that it depends on what other things investors might choose to buy with their money are doing. Mortgages are not usually held by lenders for the life of the loan. They are usually bundled together and sold to investors in what are often called "mortgage backed securities." Sellers of these investments have not had to offer super high returns in order to find buyers for those securities, as they tend to be pretty secure. Those returns to the investors come from the interest home loan borrowers are paying. When mortgage based investments are in high demand, interest rates tend to go down. When investors are wary of mortgage based investments, the rates borrowers have to pay need to go up to compete with other investments and attract money into the home loan sector.

Note that how home loans as investments are perceived don't operate in a vacuum. Investors might not be too confident in people's ability to keep paying their home loans, but if they're even less confident in the ability of businesses to stay strong, mortgage backed securities will still look safer than corporate stocks (a share in a company) or bonds (a group loan to a company).

The most secure investment in the world is the United States of America 10 year treasury bond. Mortgage rates often track these 10 year notes because they are similar investments to mortgage backed securities. They're both longer term and low risk. Mortgages are not as low risk, of course, so they have to return more to the investor. The interest rate borrowers pay on their home loans generally runs about 2 percentage points higher than whatever the return is on 10 year treasury bonds.

In times of economic uncertainty such as now, mortgage interest rates, like 10 year treasury bond returns (or "yields") tend to go down because investors are looking for security so sellers of these investments don't have to compete as much for their dollars.

This is a very simplified discussion of what causes home loan rates to go up or down. We didn't, for example, get into the role of Fannie Mae or the Federal Reserve, and it's important to understand that lenders charge higher or lower interest rates to borrowers based on their own considerations. Right now there is a lot of demand for refinance loans so lenders have been charging a bit more than they might otherwise if they were having to compete more for loan customers. It's a balancing act: on one side lenders want to entice people to take out their loans, and they're competing with other lenders so they have an incentive to keep their rates as low as possible while still making a profit; on the other side they want to be collecting enough interest from their borrowers that when they go to sell these loans they can find buyers.

We hope you found this interesting! Our agents have great contacts in the industry so when you get ready to buy, they can give you names of lenders our other clients have had good experiences with. A good lender is responsive and conscientious, making sure there are no last minute surprises.