Relationship Between Treasury Notes And Mortgage Rates – 3 Facts You Should Know

Who wants to know in which direction mortgage rates are headed? Answer: just about anybody who is looking to buy a home, move house, or refinance their home mortgage.

As hard as leading economists try, nobody knows for sure in which direction rates are heading. For the aspiring prognosticator, all we have is the ability to look at recent trends. But, in order to get a better handle on what determines mortgage rate changes, it is helpful to gain an understanding of the relationship between Treasury notes and mortgage rates.

If you are wondering about whether treasury notes affect mortgage rates, check out these 5 facts you should know:

1. Treasury notes are the safest type of investment:

Treasury notes are sold by the U.S. federal government in an auction-style format as a way of paying for the national debt. Yields on Treasury notes go up or down based upon whether they are auctioned at above face value (low yield) or at below face value (high yield).

They are considered a very safe investment because they are guaranteed by the United States government. They are even safer of an investment than are investment options such as CDs and money market funds. Of course, the return on investment for Treasury bills is also very low, due to the low risk.

2. Treasure notes directly affect mortgage loan interest rates:

When Treasure note yields are higher, mortgage interest rates go up. The converse also remains true: when note yields are lower, mortgage interest rates go down. Why is this? The reason is that investors who want a predictable (fixed) return on their investment will shop for Treasury notes – or else they will shop for CDs, money market funds, mortgages, or corporate bonds. Each of these progressively has a slightly higher risk – and therefore return.

3. What are mortgage-backed securities?

Investors looking for a better return on their investment are also willing to take more of a risk. They will buy a mortgage rather than the safer – but lower return – Treasury bills. Instead of buying an actual mortgage, however, these investors will buy mortgage-backed securities.

Of course, as the yields on Treasury bills go up, mortgage lenders will need to provide even higher returns in order to attract lenders. This means higher rates for the mortgage borrower.

Note that the relationship between Treasury notes and mortgage rates only applies to fixed-rate mortgages, not adjustable-rate mortgages. The adjustable-rate mortgages are affected more by the Fed funds rate, which is set by the Federal Reserve.

As you try to guess where mortgage rates are headed, consider these 3 facts you should know about how Treasury bill yields affect fixed mortgage interest rates.

Factors That Affect Your Mortgage Rate

There are going to be many factors which affect your mortgage rate, some of which are under your control and others which you can do nothing about. You should be aware of all of the factors which might affect your mortgage rate and take them into consideration before applying for a mortgage loan. You can take steps to improve some of the factors which affect your mortgage rate and make decisions about when is best to apply based on basic knowledge about your mortgage.

What is a mortgage?

Most people understand the basic definition that the mortgage is a loan which is used to purchase a home. There is slightly more to the mortgage than this. The mortgage is a loan which uses the property itself as collateral. If you fail to make the payments on your mortgage, the property may be taken over by the lending institution who has given you the mortgage.

You want the best mortgage rates

The mortgage is a long-life loan meaning that it is not going to be fully repaid for many, many years. A standard home mortgage is often a fifteen or twenty year loan. This means that you want the best mortgage rate possible because you are going to be needing to pay this rate for a long, long time.

Factors affecting mortgage rates

Major factors affecting mortgage rates include:

o Amount of down payment on mortgage
o Consideration of closing costs
o Income of mortgage borrower
o Life of mortgage loan
o Life of mortgage rate
o Total mortgage loan amount
o Whether or not the mortgage rate is adjustable

Factors making up a desirable mortgage rate

The basic premise of the desirable mortgage rate is that it is within your budget, has a low interest rate and is paid back as quickly as possible. How all of this plays out in terms of each individual mortgage depends upon the independent factors of each borrower. For example, you might prefer a fifteen-year mortgage loan to one that is paid over thirty years. This will allow you to save money over time because you pay less in interest. However, if you can not afford the higher monthly payments and you default on the mortgage loan, you have not helped yourself out any.

Negotiating a desirable mortgage rate

The simplest method of achieving a desirable mortgage rate is to work with a mortgage broker. You will have to pay up front fees to the mortgage broker, usually at the time when all of the closing costs are paid on the home purchase, but you will save money and time in the long run. The mortgage broker plays the role of assessing your personal financial situation and working with lending institutions to negotiate the best possible mortgage rate for your situation. The mortgage broker has experience with all of the factors and terms used in the mortgage loan negotiation and can use this expertise to your benefit.

Repayment of the mortgage loan

When you are working out a plan of repayment for the mortgage loan, you should look at the amount of money available for down payment, the amount you can reasonably pay on the loan each month, the grace period of any adjustable mortgage loan interest rates and any fees owed for early repayment of the mortgage. Working with the mortgage broker, you should be able to develop a repayment plan for your mortgage which allows you to purchase and remain in your home through the life of the loan.

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