Definition of 'Mortgage Rates'
The Mortgage Rate is the interest rate that a homeowner will pay for a mortgage on their property. This rate can be fixed, variable or a combination of the two.
The best indicator of what the mortgage rate will be is the movement of the 10-year Treasury Bond Yield.
The reason that the 10-year treasury bond is the best indicator is because that is the average length of a mortgage. Most mortgages are 30-year mortgages, however, on average they are paid off or refinanced within 10 years.
A homeowners mortgage is bundled together with the mortgages of many other homeowners and then sold into the general market as a bond. These are know as mortgage backed securities (MBS) and these bonds will compete against the 10-year treasury bonds for the same pool of investors. Treasury bonds are much safer and so will command a lower interest rate than the mortgage back securities.
Bond yields and mortgage rates are positively and almost perfectly correlated. This means that when bond yields rise so will mortgage rates. Don't confuse this with bond prices rising. When bond yields rise bond prices fall.
Mortgage rates are usually priced at around 170 basis points above the bond yield. A basis point is one hundredth of a percent. This means that if bond yields are at 2.3% then mortgage rates will be around 4.0%.
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