What is the relationship between mortgage rates and housing prices?
The housing market fluctuates constantly. When buying or selling residential property, a good understanding of how mortgage rates affect housing prices can vastly alter your decisions. Having a realtor that understands this relationship can be the difference between a better and more gainful realty experience (that keeps money in your pocket), or a more painful, stressed and frantic approach that costs you money.
How are interest rates on mortgages determined?
When a person applies for a mortgage loan, they may visit a bank, credit union, or other qualified lending institution. This institution is the loan’s originator. Mortgage loan originators make money from fees and interest payments.
Originators do not portfolio, or hold on to, individual loans. Instead, they group, or aggregate, them together into bonds. This process is called securitization. Those bonds are then sold by the aggregator to investors such as pension and hedge funds, other banks, insurance companies, and governments.
Investors buy bonds and mortgage-backed securities to make money. By purchasing these products, they are lending money to the aggregator so they can use it to make more loans. Investors will then receive a portion of the interest payments collected by lending institutions.
The trail followed by a typical property loan is called the mortgage production line. It starts with the borrower and stops with the dividends paid to investors.
When making loans, banks partially base their interest rates on how much they can sell the loan for in the securitization process. Higher investor involvement means banks will make more money with bonds and securities. This means they can charge you less in interest payments and still make a decent profit. Less investors mean higher interest rates are necessary to secure a profit. Thus, the interest rate you pay on your mortgage loan is based on how much investors are willing to pay for mortgage-backed securities and bonds.
Now….how does the mortgage production line affect interest rate decisions?
When financing a home purchase, you may need to decide between a fixed or adjustable interest rate. As implied by the names, a fixed interest rate means you will pay the same amount of interest on every payment for the life of the loan. An adjustable rate means the amount of interest you make with each payment will change periodically. How often the rate changes is determined by your mortgage terms.
Current rates on mortgages are determined by market conditions like how much money is being invested into various markets, inflation, and the yield on certain U.S. Treasury bonds. Following and analyzing how these conditions trend over time provides valuable insight into what mortgage rates may do in the future.
Choosing a fixed rate mortgage when interest rates are high means you will likely pay much more in interest over the life of your loan than needed. Likewise, choosing an adjustable loan when interest rates are low could mean skyrocketing monthly payments when market conditions change. Having the right realtor that understands interest rate trends (those current, and the ones forecasted for the future) can help you decide the best decision that is right for you.
How can you get the information you need to make the right decision?
The housing market is more than just buyers and sellers. Through the mortgage production line, your home loan becomes an international affair. Your home buying process is affected by foreign events, social conditions, and other complex factors.
Professional realtors keep themselves updated and educated on factors that affect their local housing markets. They have access to relevant information, the ability to analyze it, and the experience to understand how to use it in the most effective way. Using a realtor when buying or selling your property is an investment that can save you money for years to come.