DID YOU KNOW …
The Federal Reserve does NOT control mortgage rates?
You might hear that “The Fed has raised / lowered rates”.
That statement is actually referring to the “Fed Funds Rate”, an overnight lending rate for large financial institutions.
The “Fed Funds” is not tied to mortgage rates, and little correlation exists between the two.
The Fed could raise rates, and mortgage rates could fall.
Ironically, this tends to happen.
When the central bank signals to the market that they will be “tightening” monetary policy (raising the Fed Funds) it implies the cost of credit (money) will become more expensive.
When credit is more expensive, people are less likely to borrow or take on risk.
In a credit based economy if credit growth contracts the economy will also slow down, and eventually fall into a recession.
Investors will protect against this outcome by investing in bonds, so they have the benefit of cash flow during a period of economic uncertainty.
WHY DOES THIS MATTER?
Because mortgage rates are actually determined by the price investors are willing to pay for mortgage bonds.
Mortgage bonds are how investors get exposure to mortgage-backed securities (MBS).
MBS are bundled mortgage loans.
Your mortgage isn’t owned by the company to whom you make your payment, that is your “Loan Servicer”.
Your mortgage is part of a MBS, which has many different owners based on who holds the bonds.
The price of mortgage bonds goes up when demand increases (supply and demand).
Mortgage rates are inverse to the bond price. Higher bond price = lower mortgage rates.
During times of uncertainty investors purchase more bonds, which causes their price to go up, and mortgage rates to fall.
Unfortunately for you, 99.9% of people who own a home don’t realize this, and the majority of industry professionals don’t either.
That includes loan originators and realtors – the people you falsely assume are “experts”.
You probably shop for a mortgage loan like you are price shopping for a new computer.
Good chance you are guilty of asking:
“What are rates?”
However, current interest rates matter very little.
Making a mortgage decision based on current rates is like driving while looking through the rear view mirror.
The future path of the economy is far more important than “rate of the day”.
There is a good chance you have been going about your mortgage ALL WRONG.
Before you “chase rate” and pay closing costs for a lower rate, you better make sure you talk to an expert.
You should be seeking advice on macroeconomics and the bond market long before you even think about asking a salesperson “what are your rates”.
For over a decade I have been helping my clients navigate the perilous roads of macroeconomics.
There is no “one size fits all” approach to mortgage finance, and “low rate does NOT always mean a better loan.”
You can read more about that by learning “Jon’s Law of Recuperation”.
You can also message me directly to request more information.
I hope you found this information eye opening.
I will be pulling back the curtain on more financial myths and sharing additional pro tips directly with my subscribers.
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