Mortgage Interest Rates: The How and Why

By far the question I hear the most about mortgage interest rates is “how can I keep track of whether they’re moving up or down?” The short answer is the bond market. Mortgage interest rates are largely determined by the sale of mortgage backed securities on the bond market. So if the bond market is doing well, on any given day, interest rates will go down. If the bond market is performing poorly, interest rates will go up.

Mortgage Interest Rates and the Bond Market

Bond Market Vs. Stock Market

The bond market moves opposite to the stock market. This is counterintuitive because, as Americans, we often think “hey the stock market is doing great so is everything else.” That is true for your investments, that is true for the American economy in general, but it is not true for mortgage interest rates. The bond market is considered a safer investment and thus is one made by investors when the economy is not doing well. That is why interest rates move down when the economy is not doing well, whether that’s on an isolated day, or over a long period of time.

The Fannie Mae Coupons

Fannie Mae Coupons are what we, as mortgage lenders, typically track everyday. If we see, for example, the Fannie Mae 3.5% coupon move up 40 basis points, that is a good day and we can expect an interest rate reduction. The opposite is true if that same coupon moves down 40 basis points.

Timing and economic climate

When considering the above, if the Fannie Mae coupon moved up 40 basis points in one day, that is generally great news for interest rates. However, if we are in a climate where the Fannie Mae Coupon is moving up 40 basis points everyday, we may want to wait to lock in. If we are in a climate where the Fannie Mae Coupon is moving less than 10 basis points a day, that was a banner day and it’s a good time to lock. Also to be considered is the transaction time period. Regardless of the above, if the loan is closing in a week, it’s time to lock. If we have 60 days, we may wait, if the economic climate is favorable.

If none of this makes sense to you, that is ok! You have a mortgage professional who will track the bond market’s movements and advise you on the best time to lock in your interest rate, for your specific program and product, within the time frame you are purchasing or refinancing.