Bonds Effect On Mortgage Rates

Mortgage interest rates have been a regular topic of conversation among those interested in Martha's Vineyard real estate. Those who qualify for exceptionally low interest rates will be able to buy houses worth more and end up paying the same amount each month as someone with a higher interest rate but lower value house. This advantage will make it easy for buyers to find the perfect waterfront property that they had always dreamed of.

During the housing crisis that began in 2008 and the years that followed, the low interest rates were frequently cited by people as reasons to consider buying a home. Prices and interest rates for oceanfront real estate were both extremely low. This has led to some curiosity about what impacts the interest rates and how bonds can affect mortgage rates and what people end up paying for their homes.

What are bonds?

Bonds are low risk investment options that essentially serve as loans to major corporations or organizations, such as major businesses or even countries. The entity secures the loan from a number of different people in the form of people buying up the bonds. The most secure form of bonds are Treasury Notes from the U.S. Treasury, which are guaranteed by the U.S. Government. Since these investments are so low risk, they do not pay as well as other options, but people also do not have to worry as much about losing their initial investment.

Bonds can rise and fall in worth based upon the state of the stock market and the U.S. economy. The rising and falling in value occurs because people can resell the bonds on the market. When the stock market is doing well, people are not as interested in bonds, which means their value falls. When the stock market is doing poorly, people become more interested in this secure investment, and the value rises. For this reason, they tend to be on a counter cycle compared to the rest of the market.

How do bonds impact interest rates and mortgage rates?

Treasury notes and bonds will change their yield daily. When Treasury bonds are initially issued, they are auctioned off and the price is determined by the demand. The face value of the note, however, remains constant. So, if there is a lot of demand for the note, the price of the bond will increase. The more the person pays for the note, the less money they stand to make compared to the value of the bond. This is called a low yield or low interest bond. Conversely, should there be very little competition for the bond, then the price will not rise very far. The new owners will not have to pay very much and will find themselves with a high yield bond.

When the bond prices drop and the yields increase, that means that interest rates will increase for just about all investments, including mortgages. Mortgage lenders have to carefully balance between offering homebuyers the lowest possible interest rates to attract them while also offering interest rates that are high enough to attract investors. When the interest rates, or yields, on bonds rise, the interest rates on mortgages must also rise to ensure that investors and lenders are protecting their initial investment.

The Federal Government used these principles when it worked to help the country out of the 2008 housing crisis. By buying billions of dollars of Treasury securities and mortgage-backed securities, the government was able to artificially reduce interest rates to encourage people to buy homes once again.

Investments tend to be all closely interconnected. Treasury bonds and the potential yields that they offer on a given day can impact the amount of money people pay for oceanfront real estate for that perfect home for sale on Martha's Vineyard. Understanding this process will make it easier for buyers to capitalize on market trends and secure themselves the lowest mortgage rates possible when they look to buy a home. Those looking for more information about Martha's Vineyard real estate or how interest rates are determine should contact us today.