This week has seen mortgage rates inch higher, news that the housing sector is showing signs of improvement (Sales rose 11% over the previous month) and a strong showing for the Dow Jones has us wondering why mortgage rates continue to move up. (See the current mortgage rates in your area.)


Here are the factors that affect mortgage rate movements:

The Housing Market

The simplest factor in mortgage rate movements is how actively people are purchasing homes, both new and previously owned. When there is a strong demand for housing and the real estate market is dynamic, this moves mortgage rates higher.

It’s simple economics in action or the rule of supply and demand. As there is an overabundance of houses, with an increasing amount of foreclosures and the current low consumer confidence, mortgage lenders in turn, have lowered their rates to curb these factors.

What does this mean?

Positive news and numbers that the housing sector is improving has mortgage rates moving up.

The Secondary Market

These are the mortgage banks and lenders who in turn, sell this to the secondary market. Freddie Mac and Fannie Mae usually buy these loans from your bank and brokers. We have heard a lot these days that the Making Homes Affordable programs could be availed through mortgage loans falling under Freddie Mac or Fannie Mae. That is why homeowners are told to ask if their loans fall under   Fannie Mae or Freddie Mac Loans. When Mortgage Bank Securities or MBS stock market prices drop, MBS raises their mortgage rates in order to protect themselves from risks.

What does this mean?

With the recent decline in mortgage-backed securities, mortgage rates have been raised in response to projected risks and offer better return on investments.

The Investor Market

When the secondary market buys loans, they turn them into securities or funds which large institutional investors invest in. These “mortgage-backed securities” are conservative alternatives to traditional stocks. In the past when the housing sector was at its peak, investors turned to “mortgage-backed securities” as a good way of investment as they promised high yields.

When the equity markets are performing well in the Dow Jones or NASDAQ, this creates competition against mortgage-backed securities and funds. When traditional stocks are performing well investors move their investments away from mortgage-backed securities, therefore lowering their value. To compete for investors these Mortgage-Bank Securities raise their mortgage rates to give higher-yield options to investors.

What does this mean?

Recent rallies in the Dow Jones like the 9000 point showing have moved investors from the mortgage-backed securities into the stock market to cash in on the recent gains.

Final Analysis

All three factors point to an increase in mortgage rates, with the current market movements and recent news about the housing market, it is safe to say that this trend will continue for the next few days. Getting rid of some misconceptions and understanding the basic factors affecting mortgage rates will not only help you in making wise investment decisions, but in your own home-buying decisions.

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