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Home > How are Interest Rates Determined?

How are Interest Rates Determined?

April 11, 2018 by ptrimble Leave a Comment

Although there are multiple factors that affect interest rates, the movement of the 10-year Treasury bond (T-bond) yield is said to be the best indicator to determine whether mortgage rates will rise of fall.

Why?  Though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years, so the 10-year bond is a great bellwether to measure interest rate changes.

T-Bonds are also backed by the “full faith and credit” of the United States government, making them the benchmark for many other bonds as well.

To get an idea of where 30-year fixed mortgage rates will be, use a spread of about 170 basis points, or 1.70% above the current 10-year bond yield.  This spread accounts for the increased risk associated with a mortgage vs. a bond.  So a 10-year bond yield of 4.00% plus the 170 basis points would put mortgage rates around 5.70%.  Ballpark method.

Mortgage rates are very susceptible to economic activity, just like T-bonds and other bonds which can move mortgage rates significantly higher.  I.E., jobs reports, the Consumer Price Index, Gross Domestic Product, home sales, consumer confidence, inflation. 

Hopefully you have found this information helpful. If you or someone you know has any real estate needs pleased give me a call.

Patrick Trimble
Chairman’s Circle Diamond Member       
Berkshire Hathaway Homesale Realty
150 North Pointe Boulevard
Lancaster, PA 17601
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