Factors affecting mortgage interest rates - Essay Example

Running Head: Mortgage Interest Rates Factors affecting mortgage interest rates. Factors affecting mortgage interest rates. As far as the business world is concerned, people have ventured into many different ways of acquiring capital as well as property. They have gone as far as borrowing money from financing institutions as loans which they commit their real property as security. Mortgage financing institutions as a capital market has since then arose and competently entered the market with a striking force. These institutions lend money to the public which is they use to advance in their investments. Mortgage is money borrowed as loan from mortgage institutions to finance real property acquisition. It is usually paid back in specified periods, installments and interest rates. There are several factors that affect these mortgage interest rates in any given transaction and they vary from one financial institution to another. Factors arising from US government debt. Us government debt is whereby the government raises funds from the public through issuing of debt instruments to finance its projects and debts. Treasury bill rates are defined as a short-term debt instrument of one year or less issued by the government to raise money from the public. After the maturity period, the government will pay back to the bill holder by selling him or her at a discount as matter of fact when the treasury bill interest rate increase, the mortgage interest also increases because the debt instrument encourages buying more security for the benefit of the prevailing rates. Money in circulation will hence reduce due to its demand and so fewer funds are available to facilitate property acquisition, this therefore forces the financial institution to raise mortgage interest as they are in high demand. Treasury notes contribute to interest trend, as these are the intermediaries' debt instrument issued by the government to the public in a view of raising money. It exists in denomination of 2years, 5years and 10 years. This dealt is done by Bureau of the public debt. The treasury note bearer interest payment, which are paid semi annually before the end of maturity period. If the interest rates are increases the public will invest more on the debt instrument and consequentially the mortgage interest rates increases since there will be high demand for funds for property purchasing Treasury bonds are long term debt instrument issued by the government to the public. They are issued to a period of 30 years with interest being paid quarterly to the bondholder. If the interest rate is low the public will be mean to invest on them and hence mortgage interest rate due to the fact that demand for money to finance mortgage is low. Factors arising from Federal Reserve board. Federal reserve board is a government run board to oversee the banking system in US. Federal fund rates affect the mortgage interest rate. These are rate charged on loans that are given by depository institutions overnight These interest rates lead to increase in mortgage interest rates in that for example if a depository institution lends money to another, it has to charge a certain interest. Then the receiving institution has to raise its interest rates when lending money to the public so as to offset the interest charged by the other financial institution. To effect this, the New York foundation development governs all these transactions. Federal discount rates are interest rates charged to commercial banks as well as other depository institutions for money they receive from other financial institutions operating within the Federal Reserve. These rates are usually above the prevailing market interest rates. The mortgage financial institutions, which in this case are the commercia banks, and the depository institutions will have to increase the interest rates to their clients due to the fact that they have to recover the Federal discount rates, which were charged by the financing institution. Factors arising from government backed security. Government-Backed security is a security created by the government to mortgage institutions on behalf of the public. The mortgage institution will receive the bond interest and the principal amount therein. Fannie-mae Backed security rates have a strong effect on mortgage interest rates. It is a government agent which purchases mortgage in large quantities, provides security on them and finally sells them. This security provided on the mortgage increases the security cost and this consequently led to increase in the mortgage interest rate. Ginnie-mae Backed security rates have a strong effect on Federal Housing and Administration, [FHA] and Veteran Affairs [VA]. Federal Housing and Administration finances all those buyers who are willing to buy homes across the nation. These security rates lead to increase in mortgage interest rates. Factors arising from government programs. Government programs are programs organized and run by the government to facilitate the purchase of property through mortgages. Ginnie-mae is a government agent, which purchases large quantities of mortgage property. It provides security to these properties and on selling them to the public, the agent charges a higher interest rate to recover the cost incurred. Veteran Affairs is an agency where all the claims and appeals concerning real estates and mortgage rates are forwarded. Veteran Affairs can affect mortgage interests by either lowering or raising them according to the nature of the claim. Eventually, this leads to establishment of a certain mortgage interest rate. The Federal Housing and Administration is an organization, which finances those buyers who want to acquire homes countrywide. It affects the mortgage interest rates according to the prevailing forces of demand and supply. For instance, when there is a higher demand and less supply of funds, it will charge higher interest rates and vice-versa. Other factors. Another factor that affects the mortgage interest rates is the London Inter Bank Offering Rates simply abbreviated as LIBOR. If the borrowing rates charged by the commercial banks and depository banks are high then the mortgage interest tends to be high. Certificates of deposits rates,[CD rates] are issued by commercial banks and depository banks to the public on depositing money (Immergluck, Daniel & Wiles, Marti. 2000). When the CD rates low, less people will be willing to save money in the bank. Otherwise they will invest in the purchase of real property. This continues until a point whereby money is in high demand and so the mortgage financing institutions will increase their lending rates, interest rates inclusive. Monthly Treasury Average [MTA] is an analysis of a 12-month yield, which is based on a maturity period of one year whereby the index reflects the yield performance. If the MTA index is high, it shows that the economy running on well and if the index is low, then the economy is at stake. This reveals the fact that mortgage interest rates will go up since there will be high demand for credit because of the expanding economy. Cost of Funds Index, [COFI] is interest that is paid for savings accounts. It is used to finance properties especially homes and so if their rate of interest is high then mortgage interest rates will also be high. Factors arising from consumer derivatives. Consumer derivatives are the ability of the consumer to afford funds. Fair Isaac Corporation, [FICO] is used by lending institutions as a tool in decision-making. They may charge higher interest rates or bargain for high security verification if the lending institution is not certain about the credit worth ness of its clients. These high interest rates will lead to high mortgage interest rates. These mortgage firms charge high interest rates so that incase of a default they could at least have recovered substantial amount. Institutional lenders are mortgage firms, which support or provide funds to the clients. Commercial Banks differ from one to the other in terms of interest rates. Some charge quite high rates on interests while others are preferably cheap. These different interest rates affect mortgage interest rates, for instance if the borrowing interest rate is high, then the mortgage interest rates also increases (Downie, Leonard, 1974). If the borrowing rates are low, then the mortgage interest rates are low. When there is inflation, the US Federal reserve will instill some measures like borrowing money from the public through the commercial banks. The commercial banks will hence be forced to offer higher interest rates, attracting more members of the public to deposit money in the banks. At this point, there will be low demand of money since the supply is high and so the mortgage financing institutions will be charging low mortgage interest rates to persuade them to borrow money. This continues until a point is reached whereby money demands will rise thus increasing the mortgage interest rates. Saving banks offer safe custody of its client's money and play a big role in the mortgage sector. It affects the mortgage interest rates in that they offer credit services to their customers so their interest rates which they charge on loans which they advance to their customers affect mortgage interest rates proportionally. This means that, if they charge low interest rates to their customers, the customers will be initiated to invest in property acquisition, as the interest is friendly. So the interest rate of financing vary proportionally to mortgage interest rate since the rate the banks, which are charging, are the real mortgage interest rate. Insurance companies help in safeguarding property of the investors. Mortgage interest rates charged will depend on whether the property will be insured or not. This is because insured asset have less financial liability to the lender. For Instance uninsured property will be charged a higher interest rate this is because incase of liability there will be nothing left to compensate for. Insured property will have less financial risk and so they will be charged lower mortgage interest rates because even after property damage, the insurance company will compensate the mortgage firm. Credit unions are other institutions, which offer credit facilities to their customers to facilitate property acquisition through mortgage operation (Longhofer, Stanley & Paul, Calem, May 15, 1999). Some of the customers may not be that credit worth and so the union is indifference whether to advance funds or not. The best decision will be to facilitate the mortgage but at different interest rates. The customer who is credit worth is charged a lower rate compared to unworthy customer basing on financial risks. It's therefore evident that mortgage interest rates are affected by both human and natural factors which force the trend move up and down as per the prevalent factors. The above-discussed factors have been found to affect the mortgage interest rates, some using an increase in the mortgage interest rates and others causing a decrease. Those factors that lead to decrease in mortgage's interest rates are highly recommended by the clients who are will to access the mortgage. This is because the low mortgage interest rates will motivate the clients since they will pay back the principal amount and quite a little interest rate. REFERENCES Downie, Leonard Jr., (1974). Mortgage in America: The Real Cost of Real Estate Speculation, New York: Praeger Publishers (1974). Immergluck, Daniel & Wiles, Marti. (2000). An Analysis of the 1998 Refinance Lending Patterns of Bank of America Corporation Affiliates in the Chicago Area, Woodstock Institute Longhofer, Stanley D., & Paul S. Calem, (May 15, 1999). Mortgage Brokers and Fair Lending, ECON. COMMENTARY 2. http://www.dallasfed.org/educate/pubs/fedtoday.html Accessed on 11/18/2006 http://homefinance.nytimes.com/nyt/article/mortgage-column-by-bob-tedeschi/2006.08.20.what-really-moves-interest-rates/ Accessed on 11/18/2006 http://www.frbsf.org/education/activities/drecon/2000/0012.html Accessed on 11/18/2006 Read More