With mortgage interest rates wavering up and down lately, there’s been a lot of hoopla about the cause of this roller-coaster ride. I’ll clear the air for you, and it starts with investors.
Many of them pile money into stocks and bonds. Well, mortgage-backed securities (MBS) are the bond on which home loans are based.
Here’s a relative rule of thumb (this isn’t always the case) to remember before I go any further. Often, when bond prices rise, home-loan rates usually lower. Often, when bond prices decrease, mortgage rates usually increase. Simply put, when one goes up, the other usually goes down.
So why have interest rates inched up lately? Because the vibe about the economy has shifted from negative to positive.
When optimism has surrounded the outlook of the economy in the past, investors have typically pulled their money out of bonds and transferred them to stocks, possibly worsening bond prices — keep in mind that bond prices can impact mortgage bonds. I’m not predicting this, but it has been a trend, historically speaking.
Two things happened recently that support the idea of an improving economy:
- Standard and Poors, a credit-rating service, upgraded the United States’ status from negative to stable.
- Ben Bernanke, chairman of the Federal Reserve, announced that as the economy continues to strengthen, the Fed will stop shoveling money into mortgage-backed securities.
In the past handful of years, the Federal Reserve has injected trillions of dollars into mortgage-backed securities as part of its “quantitative easing” initiative. The goal was to stabilize the economy. Now that it’s healing, it’s likely that fewer federal funds will fuel America’s economic machine.
Bernanke described the pullout as a phased process heading into 2014, possibly 2015. That means there’s still time to benefit from historically appealing mortgage loan interest rates. But when the money train comes to a halt, bond prices will most likely decrease. Remember: When prices go down, rates usually go up.