How you can learn to predict mortgage rates, too.
Many people, particularly, first-home buyers, tend to shop around for the cheapest mortgage rate that they see not knowing, or understanding, that these rates dip and fall. If you get an understanding of how mortgage rates work, you will be in a far better position to land one that really works for you and may even be cheaper than the one you’re ready to commit to, say, today.
Here’s how mortgage rates work.
The firs thing you should know about these rates is that they are unpredictable. They change. A high rate today may be low tomorrow. At one time, these rates were more stable. They were set by the bank. But since the 1950s, Wall Street took over and adjusted them according to supply and demand. Or more accurately, Wall Street linked them to bonds. So that when bonds – that are bought and sold on Wall Street – drop, mortgage rates do, too.
How can I know today’s bonds rates?
It sounds simple: let’s keep up with the prices of bonds and we’ll know when to shop for our mortgage. Unfortunately, only Wall Street has access to this knowledge (called “mortgage-backed securities” (MBS) data). And they pay tens of thousands of dollars for access to it in real-time.
Here’s how you can make an educated guess:
Calculate according to, what’s called, the Thirty-year mortgage rates.
These are the events that lower rates in any given 30 years:
- Falling inflation rates, because low inflation increases demand for mortgage bonds
- Weaker-than-expected economic data, because a weak economy increases demand for mortgage bonds
- War, disaster and calamity, because “uncertainty” increases demand for mortgage bonds
Conversely, rising inflation rates; stronger-than-expected economic data; and the “calming down” of a geopolitical situation tend to elevate rates.
The most common mortgages and mortgage rates
You’ll also find that mortgages vary according to the level of your credit rating. The higher your credit score, the more likely you are to win a lower mortgage rate.
Mortgage rates also vary by loan type.
There are four main loan types each of which has a different level of interest. In each case, this level of interest hinges on mortgage-secured bonds. The four loan types together make up 90 percent of mortgage loans doled out to US consumers.
Which mortgage loan do you want?
Here is the list:
1. Conventional Mortgages – These loans are backed by Fannie Mae or Freddie Mac who have set regulations and requirements for their procedures. The Fannie Mae mortgage-backed bond is linked to mortgage interest rates via Fannie Mae. The Freddie Mac mortgage-backed bond is linked to mortgage-backed bonds via Freddie Mac.
Mortgage programs that use conventional mortgage interest rates include the “standard” 30-year fixed-rate mortgage rate for borrowers who make a 20% downpayment or more; the HARP loan for underwater borrowers; the Fannie Mae HomePath mortgage for buyers of foreclosed properties; and, the equity-replacing Delayed Financing loan for buyers who pay cash for a home.
2. FHA mortgage – These are mortgage rates given by the Federal Housing Administration (FHA). The upside of these loans is that you have the possibility of a very low downpayment – just 3.5%. They are, therefore, popular and used in all 50 states. The downside is that the premium is split in two parts.
FHA mortgage interest rates are based on mortgage bonds issued by the Government National Mortgage Association (GNMA). Investors, by the way, tend to call GNMA, “Ginnie Mae”. As Ginnie Mae bond prices rise, the interest rates for FHA mortgage plans drop. These plans include the standard FHA loan, as well as FHA specialty products which include the 203k construction bond; the $100-down Good Neighbor Next Door program; and the FHA Back to Work loan for homeowners who recently lost their home in a short sale or foreclosure.
3. VA mortgage interest rates – VA mortgage interest rates are also controlled by GMA bonds which is why FHA and VA mortgage bonds often move in tandem with both controlled by fluctuations from the same source. It is also why both move differently than conventional rates. So, some days will see high rates for conventional plans and low rates for VA/ FHA; as well as the reverse.
VA mortgage interest rates are used for loans guaranteed by the Department of Veterans Affairs such as the standard VA loan for military borrowers; the VA Energy Efficiency Loan; and the VA Streamline Refinance. VA mortgages also offer 100% financing to U.S. veterans and active service members, with no requirement for mortgage insurance.
USDA mortgage interest rates – USDA mortgage interest rates are also linked to Ginnie Mae secured-bonds (just as FHA and VA mortgage rates are). Of the three, however, USDA rates are often lowest because they are guaranteed by the government and backed by a small mortgage insurance requirement. USDA loans are available in rural and suburban neighborhoods nationwide. The program provides no-money-down financing to U.S. buyers at very low mortgage rates.
Mortgage rates predictions for 2016
Wondering what your chances are for getting a mortgage for a good rate the coming year? Wonder no further.
Here are the predictions for the 30-year trajectory:
- Fannie Mae mortgage rate forecast: 4.4% in 2016)
- Freddie Mac forecast: 4.7% Q1 2016, 4.9% Q2 in 2016
- Mortgage Bankers Association (MBA) forecast: 5.2% in 2016
- National Association of Realtors (NAR) forecast: 6% in 2016.
In other words, mortgage rates are projected to rise slightly in 2016.