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It is impossible to predict with certainty what mortgage interest rates
will be in the future. However, generally interest rates tend to slowly move in a
particular direction for some period of time until an event or action sways them to move
in a different direction. This general movement in the same direction is a trend. By
monitoring key indices like Bonds and Treasury Bills, some people find it possible to
approximately predict the general direction of interest rates. However, monitoring a trend
is not certain because it is not possible to know the absolute length of a particular
trend. The trend could be 2 days or 200 days long. Each of the indices we track generally
affects mortgage interest rates in a different way.
Fannie Mae 30 day
Commitments for 30 Year Mortgages
The Fannie Mae 30 day Commitment Index is the interest rate the Fannie
Mae organization will guarantee for a 30 day period. This index should be viewed as kind
of a best case mortgage interest rate with the least amount of risk. Your actual
interest rate is likely to be less than or greater than this value. Because the rate is
guaranteed for 30 days, Fannie Mae assumes additional risk that the interest will rise
during that 30 day period. As a result of assuming this risk, this interest rate has a
premium attached to it. The premium is sort of a built in profit to account for any upward
movement in interest rates. However, if you don't want to assume the risk that the
interest rate will go up in 30 days, we believe that this Fannie Mae rate roughly
approximates the industry average.
The Federal Funds rate is a good indicator for the past historical trend
of Interest Rates but typically does not react quickly enough to determine future
directions in mortgage rates. It is for this reason that we have decided to discontinue
providing updates for this indicator. The Federal Funds rate is the interest rate the
government charges to banks and lending institutions if they borrow money. The federal
funds rate is usually the lowest borrowing rate available to any institution or
individual. Through policy, the government periodically adjusts this rate up or down to
moderate growth and curb inflation. When the government makes this adjustment, the Banks
and lending institutions quickly adjust their rates to reflect that change. Ultimately, an
adjustment in the Federal Funds rate will have a direct effect on Mortgage Interest rates.
A 1/2 percent rise in the Federal Funds rate will ultimately and certainly cause a 1/2
percent rise in mortgage interest rates. However, the government very infrequently changes
this rate and usually changes the rate ever so slightly. In between the governmental
adjustments, other factors generally affect the interest rate such as Bonds and Treasury
Bill Rates.
1 Year Treasury Bills or 1
Year T-Bills
One year Treasury Bills are one popular index used by lending
institutions to determine mortgage interest rates for Adjustable Rate Mortgage (ARM)
Loans. The one year Treasury Bill is less volatile than a six month Treasury Bill
or a six month Certificate of Deposit. By less volatile, we mean the rate changes less
often and the change is usually smaller. A one year Treasury Bill is a note or loan made
by the US government that guarantees a certain return on interest to the bearer. The
government takes out these loans in order to pay for the national debt and other expenses
incurred by the US government. Generally speaking, an upward or downward trend in the one
year Treasury Bill will result in an upward or downward trend in mortgage interest rates.
The one year treasury bill has a greater affect on long-term directions of mortgage
interest rate.
6 Month Treasury Bills or 6
month T-Bills
Six month Treasury Bills is another popular index used by lending
institutions to determine mortgage interest rates for Adjustable Rate Mortgage (ARM)
Loans. Its popularity has grown in the past 5 years. The Six Month Treasury Bill is more
volatile than a one year Treasury Bill. By volatile, we mean the rate changes more often
and more frequently than the one year Treasury Bill. A six month Treasury Bill is a note
or loan made by the US government that guarantees a certain return on interest to the
bearer. The government takes out these loans in order to pay for the national debt and
other expenses incurred by the US government. Generally speaking, an upward or downward
trend in the six month Treasury Bill will result in an upward or downward trend in
mortgage interest rates. The six month treasury bill has a greater affect on immediate
short-term directions of mortgage interest rate.
The 11th District Cost of Funds is another popular financial index used
as the basis for some Adjustable Rate Mortgages. We don't recommend using this index to
determine future trends in interest rates, but it may be an excellent rate to pin your ARM
against. It is a very stable rate which historically trails movements of Treasury Bills,
and in our opinion, the trends in movement are generally less dramatic. If you have an ARM
based on the 11th District Cost of Funds index you can look at the trends in this index to
approximate changes in your monthly payment.
LIBOR-London Interbank
Offered Rate
This is the interest rate offered in London between participating banks.
It is an excellent and volitile interest rate which many ARM's are based on. Many ARM's
are based on this rate because it changes on a daily basis and is a fair reflection of the
current market conditions and bond rates. If you have an ARM based on this index, you can
look at the trends in this index to approximate changes in your monthly payment. We
monitor and track both the 6 month and 1 year LIBOR interest rates.
6 Month Certificates of Deposit (CD)
Using Certificate of Deposit (CD) as an index for Adjustable Rate
Mortgages has grown dramatically in the past five years. We don't recommend using CD
trends to determine future trends in interest rates. CD's are generally a reactive index
like mortgage interest rates and as a result, CD rate changes are normally tied to other
indices like Treasury Bills. However, if you have an ARM based on a CD, you can look at
the trends in 6 month CD's to determine or approximate changes in your monthly payment.
Bonds-30 Year Yield
Bonds are debentures or loans incurred by companies, but sold on the
general market. Because they are sold on the open market and traded every day, they are
more volatile than Treasury Bills.
Bonds are the single best indicator for the immediate short-term
direction of mortgage interest rates. Since Bonds also have interest rate yields, we keep
track of their interest rate yields instead of the actual direction of Bonds to help you
track the future direction of mortgage interest rates. Therefore, the values for Bond
rates will track or move in the same direction as mortgage interest rates. This is as
opposed to tracking the movement of actual Bond indices which generally move in the
opposite direction of interest rates.
It doesn't make too much sense to track Bonds on a daily basis because
they frequently move up or down at least several times a week. Even big changes usually
result in conditions of over and under-correction that may take several days to stabilize.
Therefore, the reported values only show weekly changes.
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