Dec 29, 2008

Why are mortgage rates going up?

You might recall that we're in the process of re-financing our mortgage at a rate of 5.125%. The rate came with two float downs, so if the rate drops before we close, we'll get the lower rate.

Unfortunately, even though the Federal Reserve has since lowered the federal funds rate, the rate at our lender has gone up to 5.375%. That made me curious. I've known for a while that the mortgage rate often doesn't drop following Fed cuts, but I finally wanted to know why that is.

The best explanation I could find was this article, which states that rates are based solely on Mortgage Bonds or Mortgage Backed Securities, and therefore are slower to react to rate cuts than other financial sectors. I still don't understand why mortgage rates go up when the trend should be down, though.

Are rates going to stay where they are or maybe even go higher? I hope not. I'm being cautiously optimistic that rates will go down again because the Fed is still buying mortgages. And we still have some time.


Anonymous said...

It usually works the other way around. The economic conditions that cause the long-term rates (like mortgages) to fall often precede a short-term rate cuts.

Lowering short-term rates makes more money available to everyone, which allows lenders to increase long-term rates, which makes the debt more competitive to long-term debt investors who are taking on more risk because of the longer period of time before their principal is returned to them.

Anonymous said...

Right now rates are going up to give lenders a chance to catch their breath.... the mortgage application volume last week was higher than any one month over the last 24 months much less than in 1 week.

Lenders are trying to make low rates availbale to all but not backing up their service centers who have to have the man power to work these files from point A to closing is a critical timing issue.

As you will recall 1000's of mortgage jobs were cut nationwide with the slow down of purchasers and refinances and with the tightening of guidelines for lending money, so now this drastic drop has caught them all with their pants down- so to speak.

Did you not lock into your rate at 5.125%? If so then the rising rates should not affect yours.... you have the 2 float down options which should act as security if they do drop again before your loan is complete and ready to sign paperwork. If this is not the case then you may want to start asking some questions as to why the rate did not get locked unless you did not advise them to or if you asked to remain floating to gamble with what rates would do....

I am a lender as well as a mother of 3 who juggles it all and even being in the business these are questions hard to explain to consumers at times when they seem to be doing the opposite of what rationalization would have you believe!!

Chief Family Officer said...

Thanks, Dylan and Lisa!

Anonymous said...

Hi CFO! I'm reading this post a few days after you wrote it, but I would still like to chime in. We will be refinancing soon as well, and I have found this website to be extremely helpful. It even explains the reason why prices go up, as MBS go down. It's a little over my head (ok, a lot) in some places, but you can still get the gist of what they are saying. HTH! Thanks!

MetaMommy said...

As I understand it, current economic conditions suggest that lenders are reluctant to offer low long term interest rates because money will become more expensive to borrow in the future. As such, offering rates at ~5% locks them in at a rate that they feel is too low. That said, it's hard to predict anything financially these days. Just be glad we're not in the early 80s when mortgage rates were ~20%.