Heroic Investing
Welcome! If this is your first time visiting Jason Hartman's website, please read this page to learn more about what we do here. You may also be interested in receiving updates from our blog via RSS or via email if you prefer. If you have any questions about first responder finance feel free to contact us anytime! Thanks!

How Do Bond Rates Affect Mortgage Interest?

heroic investing logoRecord low mortgage interest rates keep on making news in real estate circles, fueling speculation among financial experts and real estate professionals about how long they’ll last, how much they might rise and what that might mean for homebuyers and heroic investors purchasing income property. But how are mortgage rates set, and why are they so low right now?

Interest rates on mortgages for homes and other property purchases are tied to bonds and securities – certificates of debt that are bought and sold by the government, financial entities and even individual investors. These kinds of investments are generally viewed as relatively low in risk, and US Treasury bonds, backed by the government, are regarded as the safest of all, so rates on these bonds tend to be low. Investors looking for low risk investments choose these and other types of bonds, as well as mortgages, so the interest rates on these financial instruments tend to correlate with each other.

The interest rates on mortgages affect the housing market as a whole. High mortgage interest rates mean less spending on home buying and reflect a general slow down in the economy while lower rates encourage home and investment buying and stimulate the economy. Mortgage rates can be either fixed or variable. Variable rates are established by the Federal Reserve in order to regulate how much banks can lend. Long term fixed interest rates, such as those available for 15 and 30 year fixed rate mortgages, are tied to Treasury bonds, which are secured by the government.

Since mortgages are offered by both government entities such as Fannie Mae and Freddie Mac and other kinds of lenders, they can be bundled in groups and offered as mortgage backed securities to be bought and sold by both institutional and private investors on the secondary mortgage markets. This makes sense for banks and other kinds of loan servicers, for which holding a mortgage for its full term of up to 30 years actually loses money. The continued movement of mortgages and mortgage interest rates makes it possible to offer more mortgages to new investors.

Because mortgage interest rates affect the housing market, and by extension the economy as a whole, the Federal Reserve can artificially manipulate them in an effort to stimulate slow movement in real estate. That’s one reason rates are currently so low; as we’ve discussed in previous posts, the Fed has been buying up mortgage backed securities at a rate of billions of dollars per month and keeping Treasury bond rates down.

Where do rates go from here? Projections for the future depend on the Fed’s continued involvement in the process as well as other factors including the health of the overall economy and the performance of Treasury and other types of bonds. But for now, heroic investors using Jason Hartman’s recommendations may find that there’s not a better time for buying income properties on a fixed rate mortgage that locks in the current low rates.

The Heroic Investing Team

Heroic investing logo

 

 

Tags: , , , , ,