NOTES FROM A MORTGAGE PROFESSIONAL: MORTGAGE RATES VS. INTEREST RATES By Mathew Schulz President/Owner at Firelight Mortgage, Board of Directors at the Colorado Mortgage Lenders Association
June 13, 2022: Stop the presses, hold the phones, the Federal Reserve will be increasing interest rates tomorrow, lock in your mortgage rate before it’s too late! Six weeks later: Mortgage interest rates have fallen by more than 1%. We’ve all heard the ads and seen the news stories. And you may have found that your clients are more confused now when seeking a mortgage for their home purchase. Here’s an in-depth explanation to the rising/falling interest rates we keep hearing about.
WHAT REALLY HAPPENED? There have been three main factors driving our economy since the beginning of the year: an impending recession, Omicron, and INFLATION. We have all felt the pain of inflation at the pump recently and a gallon of milk now might as well cost the same as a month of rent.
SO, INTEREST RATES WENT UP? When the Federal Reserve raised interest rates in June
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and July of 2022, there were two rates that they increased. The Federal Funds Rate is typically known as the rate at which banks and the Federal Reserve lends money to other banks on a very short-term basis. The other type of rate raised was the Prime Rate, which is much more tied to car loans, student loans, and credit cards, but NOT to mortgage rates.
WHY THE CONFLICTING MESSAGES? Mortgage rates are determined by the Mortgage-Backed Securities Market and these securities are bonds. Some people think it is based on the 10-Year Treasury, and that is not the case. As you may know, bonds are investment securities that are secured or guaranteed by something, whereas stocks are a sheet of paper that state you own a fraction of a given company and nothing more. Since Mortgage-Backed Securities are sold as bonds, they are considered a much safer investment tool and have a much lower likelihood of default or losing money. Based on that added security