Figuring Out Home Loan Interest Rates
Trying to figure out the interest rate on home loans at any given point can initially seem daunting. Actually, it can seem downright impossible. However, after you simplify the process using factors like the U.S. Treasury Yield for example, finding the rate of interest that you might pay on a home loan is really not all that difficult. To help you do so, here are some tips to consider when trying to figure out home loan interest rates in the future. ¨
Don't Follow Advertisements
The last thing you want to do when trying to figure out future mortgage rates is to rely on an advertisement found on the Internet or some other source. Not only do these sources often have a skewed perspective on predicting home loan interest rates, their motives are biased. In other words, it would not be surprising if such an advertisement provided you with a mortgage rate that turned out to be lower than the actual amount and leaning in their best favor.
Using The U.S. Treasury Yield
Admittedly, the U.S. treasury yield is very complex, and can seem even more frustrating with a lack of knowledge of the world of finance or real estate. However, just to give you an idea, the treasury yield is the return on investment, or ROI, of the debt obligations of the U.S. government. This yield is given as a percent of ROI from such debts. When the treasury yield curve goes up, then mortgage interest rates are likely to go up as well. Very simply put, when the ROI on U.S. treasury bonds or notes go up, then mortgages companies need to have higher interest rates (to match that of the U.S. Treasury) in order to attract investors who can buy mortgage backed securities.
While this concept may be complex, and at times difficult to decipher, it is always possible to at least have a general idea as to the direction an interest rate is headed. For instance, the 10-year treasury yield is a good indicator, and will subsequently influence a 15-year fixed rate mortgage albeit not precisely. Furthermore, a 30-year treasury yield will have a similar affect, perhaps even more accurately, on a 30-year fixed rate mortgage. In other words, the closer the durations of the treasury yield and mortgage match up, the more accurately you will be able to predict future interest rates for home loans.
To give you a short glimpse of how the treasury yield works, take the Federal Reserve's announcement last month of its plan to phase out its buying of bonds as a stimulus for the country. After the announcement, treasuries rose significantly at the thought of the country's Central Bank becoming less invested in bonds, and the market itself becoming more autonomous. What's more, although still at a relatively low rate, the interest rates are expected to continue on an upward path so long as the FED continues with a similar approach. Additionally, in a June 2013 prediction, CitiGroup predicted that the 10-year yield would increase to 3.1% over the next year. This is a significant increase considering the rate in June was 2.19%. Whether the prediction finds fruition remains to be seen, however, it is a good example of how you too can make a similar a prediction.
It is completely understandable to be overwhelmed at trying to predict future interest rates for home loans. You certainly would not be the only person in such a position; even some of the most brilliant minds have a hard time grasping the concept, but keep in mind that like learning any new knowledge or skill, it comes over time. For such reason, you should be patient with the concepts and only rely on factual data to help you along the way.