Getty Images/iStockphoto
Mortgage interest rates rose in the post-pandemic era, but borrowers recently saw some relief as interest rates rose fell to a two-year low. However, that relief was temporary, as a The interest rate increase took place in October after the drop in September.
That said, the rates are is still expected to decline in 2024 – largely due to expectations that the The Federal Reserve will cut interest rates again. Still, many potential home buyers are unsure about whether or not to do it Get off the sidelines and buy or wait to see if mortgage loans continue to get cheaper over time.
To make this choice, it is useful to understand how the mortgage interest rate is determined. Since the yield on ten-year government bonds comes into play, let’s take a look at how this can affect your borrowing costs.
Compare today’s best mortgage loans now.
What is the yield on ten-year government bonds?
To understand how it affects ten-year government bond yields mortgage interestit is first important to understand what it is.
The U.S. Treasury Department issues Treasury bills, or debt obligations, with maturities of two, three, five, seven, or 10 years. Rates for these government bonds are set at auction and investors receive interest over time. The yield on ten-year government bonds is the interest rate that 10-year bonds offer.
The yield on ten-year government bonds is of interest to potential home buyers because it has a strong yield relationship with the mortgage interest rate.
“When we see 10-year rates rising, we generally expect mortgage rates to rise,” said Emily Overton, capital markets analyst at Veterans United Home Loans.
This relationship exists because 10-year government bonds and mortgage-backed securities generally compete for the same investors.
“Capital markets investors who purchase mortgages should be incentivized to purchase these assets,” said Jess Schulman, president of Bluebird Lending. “If 10-year government bond yields rise, mortgage rates will also rise, so investing in mortgages is still an attractive option compared to investing in government bonds. Conversely, if government bond yields fall, mortgage rates will fall.”
Find out here which mortgage interest rate you best qualify for.
How does the interest rate on ten-year government bonds affect mortgage rates?
While there is a strong relationship between 10-year Treasury yields and mortgage rates, this does not mean that the two are the same, or even that one directly determines the other.
“Ten-year government bond yields are often seen as the key gauge for where mortgage rates are heading, but there is a common misconception that this has a direct impact on mortgage rates,” said Patricia Maguire-Feltch, managing director of Consumer Origination Sales at Chase Home. Loans.
Maguire-Feltch explained that several factors play a role in determining home loan interest rates, in addition to the trend in government bond yields.
“Mortgage rates are determined primarily by investor demand for mortgage bonds, which is influenced by market expectations about the direction of inflation, economic conditions and the Fed’s interest rate decisions,” says Maguire-Feltch .
Maguire-Feltch says mortgage rates and 10-year Treasury yields are often confused because they move together because the same indicators influence demand for both mortgage bonds. And treasury bills. Although the interest rates on both investments move together, there is an important difference between the two.
“We often see them following similar patterns,” says Cody Horvat, a licensed real estate agent with Compass, about government bonds and mortgage interest rates. However, he explained that “mortgage rates tend to be slightly higher due to the increased risk.”
How much higher?
“Over the past five years, the average difference between 10-year government bond yields and mortgage rates has been about 2.25%,” says Maguire-Feltch.
What happens to the mortgage interest in the last months of the year?
The good news is that trends in 10-year government bond yields are developing And Other economic indicators both suggest that potential homebuyers are likely to enjoy relatively favorable lending conditions in the final months of 2024 – at least compared to recent years.
“Right now we’re seeing 10-year Treasury yields rising from their lows last September, and mortgage rates are following a similar pattern,” Horvat says. “However, rates are still much lower than we have seen them in the past two years, so buyers who have been waiting on the sidelines for a rate cut are entering the market at a faster pace.”
However, there is also bad news. Rates may not fall much further.
“Barring any unexpected cracks in the employment situation, mortgage rates could remain near current levels for the rest of the year,” Overton said.
And she’s not the only one who has this opinion.
In fact, Horvat says that while he believes the Fed will continue cuts into 2024, “we probably won’t see massive cuts anytime soon, but slower, steady, and measured reductions as we wrap up the year.” and Maguire-Feltch says that “as the economy is in a better position than earlier this year, we may not see as many reductions in interest rates and mortgage prices as initially thought. If we see further reductions, they will likely be slow and gradual.”
Overton says so employment figures are strong enough that there is some room for the situation to deteriorate before current interest rate forecasts adjust.
“This is important for mortgage rates because we need to see higher expectations from the markets for additional mortgage rate cuts to see more improvement,” she says.
The bottom line
If you’re waiting for a rate drop, you may not be thrilled by these predictions that rates won’t fall much further anytime soon. Still, there could be an upside to stable interest rates, as Horvat warns that a big drop “could lead to a warmer-than-normal housing market after the holidays are over and we enter the new year,” as banked borrowers sideline are likely to “flood the market” and drive up prices.
“Depending on how far interest rates fall in the coming months, we could see pandemic competition in the housing market as buyers forego inspections and contingencies to give other homebuyers an edge,” Horvat says.
If you can afford to buy a house at current rates, it may be worth taking action before this happens. Refinancing later if interest rates fall further is a possibility, but you cannot get back current prices after a rise in housing market costs.
