No Easy Answers When It Comes to Rates

Anyone who pays attention to financial news knows that mortgage rates recently dropped. If we were to believe the cold calls, mass-marketing texts, and pop-up ads, you would think that it’s all down from here. Yet the markets laugh at marketers all the time, and the truth is a bit more volatile than that. Let’s dissect a bit how rates are derived and what you watch to see how they’re actually moving.

The cost of money has three basic factors: 1) what it costs to manufacture the loan; 2) the specific parameters of the loan; and 3) world economics.

All money is borrowed before it is repackaged and lent. Banks borrow against their own customers’ deposits, from other banks, the federal government, and private investors. Mortgage bankers and mortgage brokers do not have customer deposits to leverage, so they borrow from all but that first category of funding sources. Private investors can be anything from an individual person to a hedge fund. The supply of funds and the demand for those funds are different for types of loan types as well — government loans can be less expensive than conventional loans because they’re insured by the federal government, versus the private sector, hence less risk.

It costs money to lend money. Someone has to connect with you, process your request, and ensure regulations are met and policies upheld. Servicing a client doesn’t end when they get the money; it goes forth until, and even after, you have paid it back. Even the AI-backed processing systems still have humans that run them. The manufacturing cost of money includes the base rate for which the lender borrowed the money, then what it costs to produce and service it.

Your personal details drive the factors of funds as well. The amount you are borrowing in relation to the value of the collateral, your credit score, the purpose of the funds, the type of property, and how it is to be used are all big deals when it comes to the rate you pay. This is why lenders always squirm when asked, “What’s your rate?” when we don’t know anything about you or what you’re trying to do. That’s like asking your doctor for a prescription for tummy pain when they’ve no idea if it’s your colon, appendix, or intestines that are causing the problem.

Economic factors are perhaps the most vague piece of the puzzle. Greece decides it may default on its national debt, a major Houston fiberglass production plant goes offline during a hurricane, the Feds do whatever the Federal Reserve will do, and rates ping around like a game of roulette. Typically, economic turmoil is good for rates, and strong economics are bad for rates. The idea is that you have to coax folks to spend more in bad times, and maybe cannot meet the demands of funding calls in good.

As you can see, what goes on behind the scenes to generate a rate can feel spun up like the wheels of a slot machine yielding higher here, lower there, and moving all the time. Yet the best way to watch rates remains the 10-Year Treasury (US10Y). Why? Well, think of it this way: buying the US10Y is investing in America for a decade at a time, and giving you a mortgage is investing in you for decades at a time. As the yield goes up, rates go up. As the yield goes down, rates go down. You can watch this for free with a simple web search. (I like Yahoo Finance; it’s easy to read and gives good historical charts.) From there, add 2.5 percent or 3 percent, and voilà, your rate estimate.

Will we see rates go down this year? Yes, probably. Will they go back up as they go down? Yes, probably. Will we see rates below 5 percent any time soon? Probably not. What my few decades in this career have taught me is this: Rates will move, rates will change, and it is more important that one have a stable plan to acquire your property than trying to time the market for cheaper money. Houses are more unique than rates, and the interest you pay is simply a vehicle to get home.