HOW ARE FIRST MORTGAGE RATES DETERMINED?

One of the most difficult things to explain is, how are first mortgage rates determined? The reason it is so difficult to explain is that there are all kinds of media that allow people to show interest rates at misleading terms. A consumer must take the time to read the fine print for the real explanation on what is being offered.

Let me first tell you the truth on how first mortgage rates are determined. The 10-year bond is the ONLY indicator of first mortgage rates. I view the activity of the 10-year bond daily on a website at: http://finance.yahoo.com. On that site, the 10-year bond is clearly readable and the history of the bond can be seen very easily. If you were to follow the movement of that bond through history, you would see that first mortgage rates mirror that chart.

The Federal Reserve, are the people that get all the news when interest rates are lowered. They control whether or not to lower or raise the Fed Funds Rate. When this action is taken, most banks then lower the Prime Rate. The Prime Rate is what 2nd mortgages are generally based off. In other words, if you have a Home Equity Line of Credit or HELOC, and the Prime Rate is lowered ½ point, your interest rate on your mortgage will go down ½ point.

The lowering or increasing of the FED Funds Rate has zero bearing on first mortgage rates. As a matter of fact, the Fed lowered their rates a total of 1.25% in the month of January 2008 and first mortgage rates actually increased. Remember, the 10-year bond is what to look for if you are trying to predict whether mortgage rates will go up or down.