Weekly Update October 25, 2018

More of the same!  Rates ended the week from Wednesday to Wednesday exactly where it started, but the volatility was actually greater than last week!  But there is some hope in sight.  The S&P 500 is almost 10% off of is all time high set in September which could spook investors and cause them to seek the safety of mortgage bonds.  Mortgage bond prices, and in turn mortgage interest rates, are a product of supply and demand.  When investors are in a “risk off” position, they will purchase safer investments, such as mortgage bonds.  As more investors seek to purchase mortgage bonds, the bond prices are pushed higher due to simple supply and demand.  So as those bond prices increase, the yield from those bonds actually decrease. 

For a simple example, an investor might be willing to purchases a mortgage bond that pays 5% for $100.  In this case, the investor will earn $5/ year.  However, if other investors want the security of holding mortgage bonds, they might be willing to pay $110 to purchase the 5% bond from the original investor.  Although the 2nd investor will still received the same $5/ year, they payed $110 to get it.  Now the yield for the second investor is actually about 4.5% (5%/ $110), less than the original investor’s yield of 5%.

So how does this apply to your new mortgage?  Well, an educated investor should be indifferent in purchasing a 5% bond for $110 or a new 4.5% bond for $100.  That means we can now lock in new loans at 4.5% instead of 5% and the borrower saves money while the investor earns less.

 This can be confusing and unintuitive so make sure you are working with a mortgage professional who understands the markets!  As always, If you have any specific questions or scenarios you would like to discuss, I am always happy to help!