Interest Rate
Setting

The Cost Of Money

The Cost Of Money

It is a common myth that the Federal Reserve directly sets mortgage rates. In fact the Federal Funds interest rate is the overnight borrowing rate that banks charge each other to borrow money for one day for the use of government money. The Federal Reserve raises this rate by withdrawing cash from the banking system, therefore it does not directly set the value.

To understand the relationship between the Federal Funds interest rate and mortgage interest rates, you must understand the difference between short-term and long-term interest rates. The Federal Reserve has tight control over the short-term interest rate but not the long-term rate.

The long-term interest rate is broadly defined as the rate offered on U.S. Treasury securities that mature in 10 to 30 years. Mortgage rates are largely determined by long-term interest rates, most commonly identified as the ten-year U.S. Treasury bond.  (The ten-year bond has replaced the thirty-year security as the benchmark due to trading volume.)

So who really controls mortgage rates? The short answer involves investors who buy bonds in the two major corporations that buy home mortgages, Fannie Mae and Freddie Mac. These two corporations make money by selling bonds and using the proceeds to buy mortgages, which pay them a higher rate of interest than they are paying to their bondholders.

The mortgage rate will always be higher than the bond interest rate because Fannie Mae and Freddie Mac want to make a profit.  And the bond interest rate will always be higher than the expected rate of inflation because bond investors always want to beat inflation.

Digging Deeper...

Mortgage interest rates are based on the yields of Mortgage Backed Securities or Mortgage Bonds. These bonds are bought and sold daily by large investors. Bond prices, just like stocks, fluctuate by the minute. Mortgage professionals like to see bond prices rising. If your mortgage person states that rates are based on Fed Funds rates, i.e. the Prime Rate or Treasury rates, they are dead wrong and this should be a cause for concern.

Economic Events that may cause Interest Rates to Move

Bond Markets are concerned with the pace of economic growth and inflation, generally speaking mortgage bonds move opposite the stock market. So as the stock market improves, mortgage bonds generally drop in price (bad for interest rates). Probably the most important report is the Employment Report issued on the first Friday of every month by the Bureau of Labor Statistics. Stronger than expected employment growth would be bad for interest rates. A second report may be the Consumer Price Index issued monthly by the Bureau of Labor Statistics. Again, strong economic growth shifts money out of the bond market into stocks. This shift would cause bond prices to drop (bad for interest rates!).

The Effect of the Prime Rate Changing

The Federal Reserve Bank only controls the Discount Rate and the Fed Funds Rate, components of the Prime Interest Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years, a rate that is set by the Fed can change from one day to another. Again, the mortgage bond market controls mortgage interest rates. In fact, very often mortgage rates travel in the opposite direction of the Prime Rate. A bonus question: What about HELOCs?That's a different story. Home Equity Lines of Credit are usually based on the Prime Index Rate. So, their interest rate goes up with the Prime Rate. This extra bit of knowledge could be very important.

Next Steps

Financing Guarantee
Home | Apply Now | Order Credit | Loan Types | Documents | Blog

Site Map | Calculators | Glossary | Credit Scores | Privacy Policy | Legal | Affiliates

Click on feedback or call (866) 822-8500 for assistance - Last Updated:


This Website is NOT intended as a solicitation to customers in any jurisdiction in which we are not authorized to operate.

© Lightning Mortgage 2002-2008 All Rights Reserved. No part of this website may be reused commercially without the expressed
written consent of Lightning Mortgage. This site is directed at, and made available to, persons in the continental U.S., Alaska and Hawaii only.

Valid HTML 4.01!

Equal housing lender

Valid CSS!

sign-up
Sign up!

Survey | Questions? | About | Contact | Where We Lendopens new window

Now You Can Learn Those Closely Guarded Mortgage Secrets and Save Thousands!

I'll show you step-by-step exactly what to look for and avoid when obtaining or refinancing a mortgage - especially if you've owned a home before.

Pleasanton, California

Dear Friend,

Of course, you want to pay the least for owning your home.

But you're received conflicting, confusing advice, and you don't know where to turn. You want to pay the least amount both at closing and with your monthly payments, and you should!

That's where I come in. I have saved thousands of home owners millions of dollars over the years. It has been my lifelong goal.

In the past 20 years money-saving strategies have changed as mortgage types and loan programs have multiplied. Over the years I've discovered exactly what works and what doesn't work when it comes to paying the least amount to own the same house.

Keep reading, and I'll show you exactly what works and what does not work when it comes to saving you the most amount of money.

The first thing we need to do is get you to understand what you're up against. Well-meaning family members and friends sometimes pass along misleading tactics and along with advice for avoiding bait-and-switch schemes as you discuss your plans for buying or refinancing a home.

Other times ill-informed or unethical real estate professionals deliver the information to you. They really aren't at fault.

Part of the problem is our own addiction to strategies that never work...

Four strategies for saving money that never work

...Yet people always try

  1. The first is to scan the newspaper and look for the lowest advertised interest rate. Since interest rates are subject to change at least daily, the rate you'll receive has as much similarity to the advertised rate as today's winning lottery numbers have to tomorrow's numbers.
  2. The second strategy is to partially fill-out loan applications on the Internet. You expect for lenders to "fight for your business" and judge the winner as the one who quotes you the lowest rate. This never works because there are too many unknowns and assumptions made.
  3. The third strategy is leaving the choice to your real estate agent. Agents may have the best of intentions, but don't necessarily understand mortgage financing. Would you expect your psychologist to be up on the latest bone cancer treatments?
  4. The fourth strategy is to just go to your local bank. If you are satisfied with any loan offered to you, then just trot down to your local bank.

    You see banks have many different products (savings accounts, checking accounts, travelers checks, credit cards, ATM cards, Christmas accounts, car loans, etc.), but usually offer very few choices of loans.

    If you think they'll make it easier to qualify since you have a savings account with them, think again. Loan underwriting qualifications do not check simply because you have been a customer of theirs all your life. 

My strategy is to use the most appropriate loan product for each borrower's particular needs. It is not a matter of finding the best 30-year fixed rate mortgage. An interest-only mortgage may be most appropriate for you.

Is a second mortgage a better solution than a home equity line of credit?

Is really depends on how you'd like to repay the loan and how much you can afford to pay each month.

How can a person save money using negative amortization when the loan amount is going up as opposed to a traditional mortgage with the principal is being paid down?

You bet, but this option might not be right for you.

So what's the best way to obtain a mortgage?

Many people take a pessimistic view. They figure there's too much to learn, too many options. They just want to move into the home of their dreams, and be done with it. Spending a few dollars more each month is no big deal. Well, they are wrong.

Would you needlessly spend $50,000 to $200,000 more for a home than you need to pay? Probably not. But if you accept the wrong loan you could wind up over-paying even more for the same house.

What you Can Do Right Away to Turn The Tide in Your Favor

Buying a home is one of the most stress-filled, and most expensive, things that most of us will ever do. Here are three things that can make a difference:

  1. I've discovered that arming yourself with knowledge about your loan options is the best defense against paying more than you need to pay when buying and owning a home.
  2. Having a clear overall financial picture, and how your mortgage fits into that picture.
  3. Working with and obtaining advice from a trusted source, a down-to-earth, level headed expert.

I am available to help you obtain the right mortgage. One that will meet your needs. Sign-up to receive strategies that will save you money, big money. I discuss many of them in my free Mortgage Insider Secrets series. This information will be emailed to you in weekly messages.

Sincerely,

Anthony Ferlazzo
Mortgage Consultant

Sign up to receive our FREE 14-part email course 'Mortgage Insider Secrets' and save thousands on your next mortgage!
 





Rest assured, we respect your privacy and will not give your email address to anyone under any circumstance.




Sign Up and You'll Enter Our Web Site, Too!