This is from a training module we just updated for our now very elaborate JVM Lending Training Program©.
I thought it made for perfect blog fodder, as it is information all of us in real estate and mortgages should understand.
We are all so focused on mortgage interest rates that we often forget that there are many other “interest rates” that the rest of the world focuses on.
It is also important to know that there is no “one interest rate” and that they do NOT always move up and down in unison.
There are numerous interest rates that economists and market watchers observe, including:
- The Ten Year Treasury Yield – this is probably the most important of the major rate indicators, as it shows what it costs the U.S. Government to borrow at any given time. This yield has hovered in the 0.5% to 0.8% range for much of this year, since the start of the COVID crisis.
- The Prime Rate – this is the rate the banks charge their best corporate clients, and it is the rate most Home Equity Lines of Credit (HELOCS) are tied to. Prime Rate is 3.25% today, but it was 4.75% as recently as 2018. It was over 8% in the 1990s and 20% in 1980.
- The Fed Funds Rate – this is the primary rate that the Federal Reserve uses to influence interest rates overall by increasing or decreasing that rate in an effort to stimulate or slow down the economy. The Fed Funds Rate is also the rate that banks charge each other when they have to borrow overnight to pad their required “reserves.” It is a very short-term rate and it does not always influence long-term rates in the way the Fed would like. The Fed Funds Rate is currently at 0 to 0.25%, where it has been for much of the time since the 2008 financial crisis.
- Mortgage-Backed Security (MBS) Yields – Most mortgages are bundled into giant “pools,” packaged as securities and then sold on the secondary market as MBS to investors. What these investors end up paying for these MBS reflects the actual yield. Over the last ten years, the yield from the MBS has been a little over 2% higher than Ten Year Treasury Yields on average. MBS yields are higher than 10 Year Treasury yields b/c MBS are considered riskier – both from a default and a likelihood of early pay-off perspective.
- Average Mortgage Rates – These are the average rates that individual borrowers get (from direct lenders) when they take out a mortgage before the mortgage is sold to investors. Freddie Mac does the best job of tracking these averages.
Note: My descriptions above are oversimplified for brevity’s sake, and I am using “yield” and “interest rate” interchangeably, although they are not exactly the same.
The 10 Year Treasury Yield, the Prime Rate, the Fed Funds Rate, MBS Rates, and mortgage rates usually move in unison, but sometimes they do not.
For example, there have been instances where reductions in the Fed Funds rate actually resulted in higher mortgage rates b/c the market perceived the reduction in the Fed Funds rate as stimulative or as a boon to the economy – which often pushes rates up.
Similarly, over the summer of 2020, 10 Year Treasury Yields held steady or went down while mortgage rates edged up. This was primarily a result of excess demand for mortgages. But, in general, mortgage rates most closely correlate to 10 Year Treasury Yields.
No “one interest rate” for borrowers too: As a quick aside, we often tell individual borrowers that there is “no one interest rate” too. This is b/c there are as many as twelve factors that impact an individual borrower’s rate, as I explain in this blog – 12 Factors That Impact A Borrower’s Rate.
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