Thursday, June 28, 2007

THE FEDERAL RESERVE AND MORTGAGE RATES

Consumers are often confused when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. News coverage of the Fed can actually cause the confusion.

The Fed affects short-term interest rate maturities, the Federal Funds Rate, and the Overnight Lending Rate. These factors have a direct impact on the Prime Rate. However, it is a mistake to conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. Mortgage interest rates fluctuate with the market for mortgage-backed securities, which trade on a daily basis. Money to purchase mortgage-backed securities comes from overseas investors as well as domestic investors, and the flow of huge sums of money to and from these securities is subject to competition from the stock market and complex economic and political influences.

A key (but not infallible) indicator for the movement of mortgage interest rates is the 10 year Treasury bond yield. It is widely quoted, and if it is heading up, you should be prepared to face higher mortgage rates. It fluctuates constantly, and so do mortgage rates.

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