My wife and I are planning to start looking for a house to buy. We’re in no hurry, and may not end up buying for another 6-12 months, but want to be ready if a good opportunity comes along, so we’ve started getting pre-qualified for a mortgage and finding a buyer’s agent. We’ve talked to a mortgage broker who was highly recommended by several friends. Last week, she quoted us a 30-year fixed rate of 6.375-6.5% and 0.5-1 points (for a conforming jumbo loan with 20% down). This was better than the rate quoted by the banks and credit unions we talked to, so we had her send us an application. Yesterday, we got the loan application and the rate is up to 6.75% and 1 point. She said that rates had gone up, but we’re not locked into a rate until we find a house to buy so this number isn’t going to be our interest rate. However, we realized we have no idea what causes mortgage interest rates to go up or down.
The fed has been lowering the funds rate over the last year, but that doesn’t seem to have corresponded to lower mortgage interest. They raised the cap on conforming loans, but again with little effect. Are there systematic factors that determine mortgage interest rates, e.g. the stock market, the bond market, dollar strength, etc.? Or is it just a matter of the banks being freaked out by the subprime/credit crisis and not wanting to loan money for housing regardless of the credit risk? We’d really to understand the underlying factors better so we can try to form educated guesses on whether current rates are inflated or a good deal.
Most fixed-rate debt is quoted as a spread to the funding cost, which is almost always LIBOR and changes due to a complex number of things, among them the money market (i.e., the fed funds rate). You also have to consider credit spreads, which can widen or narrow based on sentiment in the credit markets. Corporate credit spreads have actually be compressing lately, but I think the most recent RMBS data I saw suggested that while residential mortgage defaults were trending sideways, they weren’t exactly improving (I think I read that we’re actually at a historic high for the number of people upside down on their houses).