Does Your Mortgage Professional Really Know the Industry?

Does Your Mortgage Professional Really Know the Industry?

I'm sure you'll agree that a home mortgage is one of, if not the largest, financial investment a person will make in their lifetime. I'm sure you'll also agree that given the importance of this investment you would want an industry professional who knows their industry! With that in mind here are a few questions to ask to assure yourself that the professional with whom you are talking has a handle on the industry and, directly, your best interests.

1. What are interest rates based on?
Mortgage interest rates are based on the yields of Mortgage Backed Securities or Mortgage Bonds. Bonds are bought and sold daily by large investors. Bond prices, just like stocks, fluctuate by the minute. If your mortgage person states that rates are based on Fed Funds rates, i.e. the Prime Rate or Treasury rates, they are dead wrong.

2. What's the economic event that may cause interest rates to move?
Bond Markets are concerned with the pace of economic growth and inflation. Generally speaking mortgage bonds move opposite of the stock market. So as the stock market improves, mortgage bonds generally drop in price, bad for mortgage interest rates (increase).
The most important report is the Employment Report issued on the first Friday of every month by the Bureau of Labor Statistics. Stronger than expected employment growth would be bad for interest rates. A second report may be the Consumer Price Index issued monthly by the Bureau of Labor Statistics. Strong economic growth shifts money out of the bond market into stocks. This shift would cause bond prices to drop thus mortgage interest rates will rise.

3. When the Prime rate goes up, what happens with mortgage interest rates?
The Federal Reserve Bank only controls the Discount Rate and the Fed Funds Rate, components of the Prime Interest Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years, a rate that is set by the Fed can change from one day to another. The mortgage bond market controls mortgage interest rates. Very often mortgage rates travel in the opposite direction of the Prime Rate.

4. What's happening in the market now and what do you see ahead?
There is sufficient market information on a daily basis that allows a mortgage professional to recognize trends. For instance, if the employment numbers are to be released tomorrow and you are not locked in to your interest rate for your new mortgage loan, it would be imperative to determine potential market direction to decide whether to lock or float your new loan rate. A response such as "Gosh, if I could predict the future I wouldn't have to work for a living" would be a huge red flag that your mortgage professional is not engaged in their industry.