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The Federal Reserve and Mortgage Rates - Understanding What Causes Interest Rate Movement

 


 

Joe Gonzalez
Branch Manager
1st Metropolitan Mortgage
Phone: 610-351-7510
Fax: 610-351-7810
jgonzalez@1stmetro.net
www.1stmetropolitan.net
 
The Federal Reserve constantly evaluates the US economy and, when necessary, takes steps to address inflationary concerns and avoid economic recession or depression. The mass media, in turn, reacts by providing a wide range of opinions and interpretations of the Fed's monetary policy. This can make it very difficult for consumers to decipher how such actions will influence interest rates in general and mortgages in particular.

And although actions of the Federal Reserve can have a direct impact on the Prime rate, mortgage interest rates are dictated by the trading of mortgage-backed securities, which are similar to bonds and trade on a daily basis. This means that the real dynamic at the heart of interest rate movement is the competitive relationship between stocks and bonds.

Stocks, bonds, and mortgage-backed securities compete for the same investment dollars on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling off of other investments, including mortgage-backed securities.

Unfortunately, when mortgage-backed securities are sold off to fuel stock market rallies, this causes interest rates to go up, not down.

Historically, there have been many instances where the Federal Reserve has increased interest rates, arousing fears that corporate profit margins would be affected. This resulted in stocks being sold off, leading money managers to search for a place to invest their newly liquidated assets until the next market rally. One such safe haven has been mortgage-backed securities, which cause mortgage rates to drop.

The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients and advise them of opportunities to manage their mortgage debt at a better rate. This is the foundation of my business model as a trusted advisor.

If media reports have led you to second guess whether it's a good time to purchase a new home, give me a call. We'll analyze your financial situation together and create a plan that's right for you.



 

For help or questions contact:

Joe Gonzalez

Senior Loan Consultant -  NMLS #126036
GMH Mortgage Services, LLC
625 W. Ridge Pike, Building C, Suite 100 | Conshohocken, PA  19428 | Direct: 610-355-8039 |  Cell: 610-739-6563

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Comment balloon 2 commentsJoe Gonzalez • July 18 2008 12:42PM

Comments

Hi Joe,

Nice post with a good explanation.  Have a great weekend.  Michael A. Caruso

Posted by Michael A. Caruso (Surterre Properties) almost 10 years ago

Great post !  The correlation gets a lot of people confused !!!  Even after 39 years, I still get confused too but am getting more in tune with it each year !!!

Chris Somers   www.thesomersteam.com

Posted by Christopher and Stephanie Somers - Realtors - Philadelphia Real Estate (Realtor / Owner - RE/MAX Access) almost 10 years ago

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