How Mortgage Rates are Determined

Over the past few years, I’m sure you’ve heard about how mortgage rates are at historic lows, and truth is, they are.

This graph shows the interest rate on a 30-year mortgage over the past 40 years.

This chart, from the Federal Reserve Bank in St. Louis, clearly shows that the rate on a 30-year fixed-rate mortgage is the lowest (or at least near the lowest) it has been in more than 40 years.Low rates obviously create excellent buying opportunities for consumers, but rates won’t stay this low forever.

So what determines the rate one pays on a loan? How can you know if mortgage rates are going up? The answer is a lot simpler than you think.

Mortgage rates are tied to the yield of the 10-year U.S. Treasury Note, commonly referred to as the “T-Note,” “10-year bond” or “10-year T-Note.” The rate on the T-Note represents what the U.S. government has to pay to borrow money over a 10-year period. As a result, it is considered the benchmark for all other loan products, and thus the banks use it when setting interest rates for their loan products, whether the bank is lending you money (such as a mortgage or auto loan) or you are lending money to the bank (via a savings account or certificate of deposit).

You can find the yield on the 10-year bond listed on the front page of nearly every financial news Web site, usually listed in a table that has other numbers and prices that are important to investors, such as the Dow Jones Industrial Average and the price of gold. You can expect interest rates to go up when the yield on the 10-year T-Note rises, while rates are likely to fall when the yield drops. So if you’re thinking about purchasing a home, and the yield on the T-Note starts increasing, you might be best served to go ahead and pull the trigger before rates rise further.

If you have more questions about mortgage rates, feel free to contact Keystone Mortgage for more information.