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The Federal Reserve and Mortgage Rates: Understanding What Causes Interest Rate Movement Main Boise Home Loans
So what if the Federal Reserve raises interest rates! Sure, it makes the cost of borrowing on your credit cards and home equity line of credit more expensive. However, did you know that the Prime Rate has very little to do with the mortgage rate that you will get approved for on your next mortgage? Read on to see what really sets that mortgage rate!

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Dear BuildingCredibility.com reader:

 

Consumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.

 

The Federal Reserve affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage-backed securities, which trade on a daily basis. The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds.

 

Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed securities.

 

Unfortunately, selling mortgage-backed securities to fuel stock market rallies causes interest rates to go up, not down.

 

Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage-backed securities which cause mortgage rates to drop.

 

The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients, and advise them of opportunities to manage their mortgage debt at a better rate. This is the foundation of my business model as a Trusted Advisor.

 

If you have any questions regarding this stocks vs. bonds dynamic I described, or should you desire more information on this subject, contact me at Millennium Mortgage & Insurance, Inc., at (208) 880-0316. You can also find us on the web at http://www.millennium-mortgage.com, or visit my personal website at http://www.ericsloans.com.

 

Regards,

 

Eric Leigh, Senior Loan Officer

Millennium Mortgage & Insurance, Inc.

 

PS:  As a value-added bonus for our BuildingCredibility.com readers, we are now offering you a free subscription to both of our client monthly publications. The focus of our first monthly mailing is centered around providing you timely mortgage and financial industry specific information. The second is a YOU! Magazine subscription, which is centered around...well, you! Articles contain information about YOUR mortgage, YOUR health, YOUR family, etc. To start these free subscriptions, please email me at eric@ericsloans.com and ask to OPT IN to the monthly mailings!

 
Posted by Eric Leigh at 7/16/2007 3:01:00 PM
Comments (1)
Re:The Federal Reserve and Mortgage Rates: Understanding What Causes Interest Rate Movement
Historically if one was to plot a graph of mortgage rates vs (stocks and fed rate) for lets say 1990-2001....what would have the strongest correlation.

I get some of your point, but I must say I think the last few years of CDO's and such are the exception...and to a large extent a dangerous failure of the market. In normal conditions, which I hope we return to eventually, the lenders lend at a cost above their average borrowing rate...mgs vs fed rate.

CDO's and such are a short lived part of the recent housing bubble, and Bear Sterns and the likes will bear the scars of attaching housing to the stock markt versus more conservative paractices...

It's funny to think of these wall street types now owning homes in rural Georgia after the bust..haha...

Do you really see this as a new chapter or an anomally?
Posted by on 7/17/2007 12:57 PM
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