What Makes Mortgage Rates Rise And Fall? 10-Year Treasuries

mortgage-rates2-300x249Homebuyers are always interested in mortgage interest rates because it makes a difference in their monthly payments and their buying power. A 1% increase in mortgage interest rates can decrease buying power by 10%! That’s the difference between buying a $180,000 house or a $200,000 house.

Why do mortgage rates fluctuate? Mortgage rates are directly impacted by the rates offered on 10-year US Treasury Bonds.

When rates on 10-year treasuries rise, then mortgage rates rise. When 10-year treasury rates fall, then your mortgage rate falls along with it. And the change is almost instantaneous.

Why Are Mortgage Rates and US Treasury Rates So Tightly Connected?
Home mortgages are bundled by Mortgage Aggregators (mostly Freddie Mac, Fannie Mae, Ginnie Mae) into investments called Mortgage Backed Securities. These investments have an implied government backing (which means safety) so they get a AAA rating. This AAA rating puts Mortgage Backed Securities in competition with US Treasury Bonds.

10-year US Treasury Bills and Mortgage Backed Securities compete head-to-head for investors who want safe, secure medium-term investments. Therefore the two investments must offer competitive returns to attract the investor’s money.

Mortgage rates follow treasury rates. So watch the 10-year US Treasury Bond rates and you’ll know which way mortgage rates are going.

Why Do Mortgages Compete with 10-year Treasuries and Not 30-year?
Investors compare 30-year home mortgages to10-year treasuries and not 30-year treasuries because statistics show that most home mortgages only last for seven years. Homeowners sell the house or refinance the loan, which results in a payoff of the mortgage. Therefore the best correlation is the 10-year US Treasury Bond.

Mortgage Interest Rates Since 2008 and Beyond
Since 2008, mortgage interest rates have been historically low. In 2013, rates were only 3.5%! In 2014, rates have risen to 4.5% or so. However, consider that in the 1980’s, mortgages were as high as 18%…so the 4.5% looks really good by comparison, right?

Since 2010 the Federal Reserve has spent $85 million per month, much of it on 10-year Treasuries. The effect of these purchases is to artificially push down treasury rates, and thus mortgage rates. In 2014 the FED began slowing down their Treasury note purchases, driving up treasury interest rates, so it’s logical that mortgage rates will increase as well. How high will mortgage rates go? No one has a crystal ball to tell us the answer.

My advice is to take advantage of the artificially low mortgage rate environment while you can, if you are in the market to buy a house or refinance. You don’t want to be the person in 10 years who is complaining about missing the opportunity for a cheap loan.

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