Buying a house is exciting until it comes time to find a mortgage. If you want low interest rates, you’ll need to wait until treasury bond rates are high since the two have an inverse relationship that affects each other. But how do bonds affect mortgage rates, and why does it matter?
If you need help understanding this confusing topic, your trusted mortgage broker in Houston, TX, Champions Mortgage, can help. We explain the ins and outs so you can learn the best time to sign a mortgage loan.
Bonds and Mortgage-Backed Securities
Even if you don’t have any bonds, their interest rates will affect the rates of mortgages. That’s all because of the investor competition in secondary markets. Investors will buy bonds and mortgage-backed securities and sell them on the secondary market for a profit or quick returns.
Understanding Bonds
Purchasing U.S. Treasury bonds is a lot like loaning the government money. If you buy a $1,000 bond at a 4% interest rate over 10 years, the government will pay back your initial investment plus $40 per year in interest, coming out to $1,400.
However, if the investor decides they don’t want the bond anymore, they can sell it to someone else. Selling only makes sense if they can earn more than they invested, so they’ll need to sell when the interest rate is lower than the one their bond is locked in at. In our example, you would need to sell your $1,000 bond when the interest rate is below 4% to make a profit.
Understanding Mortgage-Backed Securities
Mortgage-backed securities, or MBSs, are another investment option. Banks can sell groups of mortgages to investors who will then receive interest payments and part of the principal from everyone whose mortgage is in said group. After you sign off on a mortgage, your lender sells it to a government-sponsored enterprise who then packages it up with others and sells the group to investors.
How Do Bonds Affect Mortage Rates?
What do bonds and MBSs have to do with each other? Investors only have so much money to invest, so they often must choose between bonds and MBSs, creating an inverse relationship where low bonds mean high mortgage rates and high bonds mean low mortgage rates.
Low bond interest rates aren’t attractive to investors. They would much rather buy a bond with a 5% return than a 3%. Since nobody wants to invest in the 3% return, mortgage brokers raise the interest rates so investors will want to buy them.
High mortgage rates are bad for homebuyers, but they’re great for the people investing in MBSs because they’ll get more money from the high interest, whereas they’d lose money on the low bonds.
When mortgage rates are low, bond prices go up, and that’s great news for prospective homebuyers. The investors don’t want low interest rates, so they’re busy buying bonds, but you get to enjoy lower interest rates on your payments.
One thing to remember is that this only applies to fixed-rate mortgages. Adjustable-rate mortgages (ARMs) can change monthly interest rates based on what the Federal Reserve decides.
Champions Mortgage Can Help You Navigate Bond Rates
How do bonds affect mortgage rates? To recap, if bond rates are low, mortgage prices go up so investors will make more money off of interest rates. If mortgage rates are low, bond rates will be higher to entice those investors.
If you still need help understanding if low-interest bonds are good or bad for homebuyers, reach out to Champions Mortgage at (281) 727-2500. We’ll help you navigate and find a mortgage to suit your budget. Contact us today.