If you’re in the market for a new home loan you’re probably searching for the lowest mortgage rate. As a homeowner does anyone really understand how mortgage rates work? Sure, the lowest mortgage rate should result in a lower mortgage payment, but how do you get low rates without paying too much for them? Here’s an insider’s guide to mortgage interest rates written by retired mortgage broker Louie Latour.
The Fed and Interest Rate Cuts
If you follow financial news you’ll often hear that the Federal Reserve is cutting interest rates with the hope of fending off inflation. This means that mortgage rates go down as well…right? Unfortunately, when the Fed cuts interest rates they are only lowering short term rates, which have nothing to do with the interest rates on your home loan.
30 Year Mortgage Rates
When the news reports a drop in interest rates many homeowners jump on the refinancing bandwagon looking for a drop in thirty year interest rates that usually doesn’t happen. The reason mortgage rates don’t go down is that the Fed Funds rate is the interest rate paid by banks when they borrow money from the government. The logic behind lowering the Fed Funds rate is that it will make it easier for banks to borrow money and their savings will trickle down to you, the consumer. When this happens the interest rate on your car loans, credit cards, and other lines of credit should go down.
Remember the Fed only tinkers with short term interest rates. Long term interest rates like what you’re paying on a 30 year mortgage don’t work the same way. When it comes to mortgage rates the Fed has nothing to do with what lenders charge for fixed or adjustable rate mortgages. Long term interest rates like 30 year fixed rates are influenced by what happens in the bond markets. The fluctuation you see in mortgage rates has more to do with the yield on bond investments like the 10 year bond. Predicting mortgage rates is nearly impossible and likening them to bond yield is an oversimplification but there isn’t really any better way to explain why mortgage rates rise and fall.
You can track 30 year mortgage rates by watching the yield on the 10 year bond. Remember that yield is the return of investment in the bond market. When the 10 year bond yield drops, which usually coincides with bad financial news, mortgage rates like the 30 year fixed rate will also go down. This bond yield is usually why you see mortgage rates go down in bad economic times like the current recession.
Mortgage Rate Secrets
Now that you know that the Federal Reserve lowering interest rates has nothing to do with mortgage rates, how can you get the lowest mortgage rate for your next home loan? The trick to get the lowest mortgage rates isn’t to shop for the best loan or lender, but to find the right person to arrange your loan. This may sound backwards to some; however, mortgage loans are basically retail products and the mortgage quotes you receive online or from your local mortgage broker have all been marked up to create an extra commission for the person arranging your home loan. It doesn’t matter if you get your mortgage from a broker, your bank, or even that faceless internet mortgage lender you see on television, they’re all marked up in one way or another. The good news is that this markup of your mortgage rate is not only unnecessary, but it can be avoided.
What Are Par Mortgage Rates?
If your head is still spinning from all that talk about the Fed and bond markets, forget everything you’ve read to this point. If you want the lowest possible mortgage rate for your next home loan you need to get a par mortgage rate. Assuming you have a decent credit rating the mortgage rate you get has nearly nothing to do with your credit or financial details and everything to do with the fees generated by originating your home loan. Confused? Think of a “par” mortgage rate as a wholesale interest rate, one that hasn’t been marked up to create a commission and doesn’t cost you anything to get. Par mortgage rates are the lowest possible mortgage rate available to anyone that knows how to get them.
You can learn more about getting a par mortgage rate (also known as a wholesale rate) for your next home loan by checking out my free Underground Mortgage Videos. Here’s a sample of what you’ll get today when you sign up:
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