Mortgage buyer Freddie Mac said Thursday that the average rate on 30-year, fixed-rate mortgages rose to 3.94 percent from 3.88 percent last week. At this time last year, the benchmark rate was 3.47 percent. The historic average was roughly 6 percent.
This means that the 30-year fixed-rate increased to its highest point in the past three months, according to Freddie Mac’s latest Primary Mortgage Market Survey.
Meanwhile, mortgage applications declined last week, according to the latest data from the Mortgage Bankers Association. The market composite index — a measure of total loan application volume — decreased 4.6 percent. The refinance index dropped 3 percent, while the purchase index fell 6 percent.
Mortgage rates today are still very favorable for home buyers. The climate is highly-encouraging for real estate purchases.
What causes rates to rise and fall?
Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates, because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
When rates fall
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is not five percent.
Your interest rate: $50 annual interest / $1,000 = 5.0%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000, because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
$50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.
The Certo Team
55 N. Arizona Place Suite #103
Chandler, AZ 85225
Contact a licensed housing specialist now! 602-429-6789