The Home Buyer's Korner

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March 26th, 2015

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Average Mortgage Rates for March 26th, 2015


Mortgage interest rates continue to decline on the heels of the FOMC Statement. Freddie Mac reported that lenders were offering conventional 30-year mortgages at an average of 3.69 percent, which is down from 3.78 percent a week ago. The average for 15-year fixed home loans slipped from 3.10 percent to 2.97 percent while the initial rate on loans fixed for the first five years before becoming variable fell from 2.97 percent to 2.92 percent.

Our economy and mortgage rates are closely tied together with the Federal Reserve having a direct effect on your pocketbook and the Fed makes policy based on the economic influences both in and outside our borders. The Federal Open Market Committee (FOMC), which is called Fed’s decision-making arm, assesses our economic health to determine interest rates. Based on what the FOMC believes about the economic condition, i.e. growth, inflation and employment), the Fed decides what the short term interest rate will be and consequently what banks will charge consumers. The federal funds rates are one of the key policy rates that affect your mortgage interest rate

When the Federal Reserve keeps the federal funds rate at low levels, it impacts the entire US economy through other interest rates that make borrowing for home buyers cheaper and consequently encourages home buyers to secure mortgage loans, all of which helps to stimulate economic growth, increase employment and even influences the rate of inflation to some degree.

When inflation is perceived as being too high the Fed and the central bank will increase the interest rates in order to control the money supply in the economy. The target for the federal funds rate was as high as 20 percent in the inflationary early 1980s and steadily declined since then. The FOMC has maintained a target range for the federal funds rate at a record low of 0 to 0.25 percent from December 2008 onward and recently has been looking to increase the inflation rate to 2.0 percent. However outside influences like oil prices and prevented the Fed from reaching those targeted rates

Mortgage rates are not immediately affected by a change in the economic situation or interest rates, but there are many links that slowly transmit their influence. So, what do the mortgage rates depend on? Long-term Treasury yields that directly impact fixed mortgage rates; the most commonly used is the 10-year Treasury note.

Let’s relate yields on Treasuries to the economy. Say that the economic outlook is bleak here in the US or other parts of the world. When this occurs people want to move out of stocks towards US government bonds and securities for investment, as they are considered the safest in the world.

This increases the demand for these instruments, pushing bond prices up. As bond prices move up, the yield (or return) on them falls. As yields fall, mortgage rates also start coming down. Thus, on the whole, a sluggish economic scenario here or concerns overseas will be accompanied by lower mortgage rates, as the Fed and the central bank tries to stimulate the economy or create security. The opposite is true when the economic situation and outlook is good here and around the world.

While the federal funds rate (and other interest rates) does not have a direct effect on long-term fixed mortgage rates, they do have a direct effect on the adjustable-rate mortgages (ARM). This is because the adjustable-rate loans are reviewed and revised on a monthly, semi-annual, or annual basis, depending on the tenure and are linked to short-term treasury yields.

When contemplating taking out a home loan, you should check which direction the fixed mortgage rates are heading and look at the Federal Reserve’s statement on the economic situation. These sources can give valuable guidance on the economic situation and mortgage rates.

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