Unraveling the Mortgage Rate Mystery

Mortgage rates are relatively low at the moment, but there’s little doubt they’ll begin creeping up. It’s important, then, to have some knowledge of how mortgage rates are determined and what the picture might look like in the future.

Fixed Interest Rates

Fixed interest mortgage rates are tied to the 10-year U.S. Treasury note and are indirectly tied to the prime rate. In today’s economic times, the 10-year note tends to be a more stable investment than the stock market. The demand for this type of security increases the price, which decreases the yield, which is tied to fixed mortgage rates, resulting in lower fixed rates. Once the demand for stocks increases and bonds decreases, the yield will rise, and so will fixed mortgage rates.

Adjustable Interest Rates

Adjustable mortgage rates, as well as credit card rates and car loan rates, are often tied to variable indices, such as the U.S. prime rate. The prime rate is the rate at which banks lend money to one another. It is presently at a historical low in light of the economy.

But when the economy starts to turn around, prime and other indices will be likely to rise, and this is to be expected, as they have been low for some time now.

Other countries, including Australia, have started to increase the prime rate, as they are seeing slight improvements in their economies. The U.S. prime rate should remain where it is now for the foreseeable future, but it will eventually increase.