Expert: Doug Ingram - 6/25/2007

Question
Hello -
I am trying to figure out how to read trends that leads to a mortgage interest rate increase or decrease.  I want to learn what affects the rates.  I am under the impression that bonds play a large roll, but I don't know which ones and how to analyze it. Meaning if certain bonds go up or down what will happen to mortgage interest rates?  What about the stock market, does that play a roll? If stocks are good what happens to interest rates.  Or what about the value of the dollar, GDP, or consumer purchasing power..all these I have heard of but don't know how they play a roll in interest rates. I know inflation plays a part but I don't know why. I want to know the reason why rates are going up or down.  If you know of a website or page that explains this you could just forward me the link so you don't have to explain it yourself. I have looked around but I haven't found answers.  Thanks for your time!!

Answer
Ryan,
The key to fixed rate mortgages is to follow the 10-year Treasury note.  Mortgage bankers price their rates at a spread to this government rate because they can hedge against it and it is the accepted process.  That way, large dealers buy these individual mortgages and pool them together.
I'd say fixed rate mortgages are usually 1.5 to 2.5 over the 10-year yield.  Investors of course want more than the safe 10-year yield for buying these pools of loans and perpetuating the process.
http://finance.yahoo.com/q?s=^TNX
(Here's a place to follow the 10-year note.  You can change the timeframe on the chart and even download historical data going WAY back.)
The stock market plays very little roll is this.  Of course, if interest rates are lower, people invest less in bonds and seek stocks or real estate (why we just had a big housing bubble).
So stocks being good or bad is more based on what people think of the economy!  If borrowing costs are low, companies can also make more money.  The Dollar will do better or worse depending on how its holding its value versus other countries.  Right now the Dollar is trading lower because we're printing too many of them and the Euro is holding ground better.  GDP and other factors play a role but they all intertwine.  If GDP is higher, rates will be higher because inflation is usually occurring when growth is very good.  Rates go up or down depending on what investors think will happen to the economy and inflation.  If inflation is expected to be a problem, rates go up.  Our rates also go up or down based on global factors.  If there is a stock market scare or some kind of major threat, investors buy Treasuries and that makes the yield go lower.  (Supply and demand).
Less buying makes the yields (rates) go up.  Companies and governments have to offer a higher rate to borrow.
Some mortgages are based on short-term rates, but to do so, you have to make them adjustable to those short rates.  The Fed increased the funds target rate from 1 to 5.25 over the past few years and now those types of loans are seeing their payments go much higher!  (These indexes are LIBOR, TBills, and 1-year Treasuries.)

See if these help:
http://www.mortgagenewsdaily.com/wiki/Mortgage_Rates_Changes.asp
http://ezinearticles.com/?Selecting-a-Mortgage