Why The Low Mortgage Rates?

Interest rates continue to defy expectations and keep declining. The big question is why? The answer is it's complicated.... sort of.

Mortgage interest rates are closely related to the bond market; particularly the treasury bonds issued by the United States government. Therefore the short, simple answer is when US treasury rates change, mortgage rates generally follow.

It gets much more complicated when one tries to understand how the the US Treasury bond rates and prices are calculated. It has a lot to do with the general economic market condition at any given time.

Selling treasury bonds is how the government borrows money. Those who buy them are loaning money to the government. Like any lender they expect to earn interest on their money. There are long term 10-30 year bonds and short term 2 year bonds. These bonds will pay a fixed rate of interest to the holder at certain regular intervals during the term of the bond; usually every 6 months. At the end of the term, which is called the maturity date, the holder of the bond can get the face value of the bond from the government. Since they are issued by the US government they are believed to be a safe place to put ones money. Therefore, during uncertain economic times a lot of investors will put their money in US bonds rather then stocks. This makes the demand for bonds rise and therefore the price of bonds will rise. But as the price of the bonds rise, the amount of money which investors earn from them (the yield) goes down. This happens because during bad or uncertain economic periods investors are willing to accept less money in order to have the relative safety of the bonds.

Mortgage bonds are also thought to be safe but not as safe as US Treasury Bonds. (Remember 2008). Therefore in order to compete for investors those who issue mortgage bonds will pay slightly higher interest then treasury bonds. But like anyone borrowing money they don't want to pay more then they have to. Therefore mortgage rates tend to track just above treasury bond rates.

Don't worry if you don't understand this. You don't have to understand how it works to know that if you're planning on buying a home, low interest rates are good news. If you want more information about home loans contact Jerome Prazak at Prime Lending.