Timing is everything when it comes to buying a house. There is one vital tip everyone should know before achieving that milestone.
Now that the Fed is beginning to cut interest rates, the housing market is slowly recovering. For many first-time home buyers, that is excellent news.
However, there are some people who might rush to buy their first house and sacrifice more money than necessary for a mortgage.
There is one vital tip everyone should know before achieving that milestone. It is a personal finance hack, and perhaps the one thing many professors don’t teach.
Before revealing the game changing tip, it is important to understand what affects mortgage rates…
Treasury Yields
It is important to know what affects mortgage rates. It comes down to a few factors, but for the sake of this argument, we’ll be focusing on two.
The first factor is the current 10-year treasury note yield. When the economy is doing poorly, investors like to invest in bonds because they are less risky than other investments. As a result, bond prices rise, and their yields decline.
Bond prices and yields are correlated inversely, so when bond prices are lower, the yields go up. Investors would rather invest in stocks because they offer higher returns, but if investors think the economy will do poorly in the near future, they’ll invest in bonds, such as mortgage-backed bonds, instead.
Simultaneously, mortgage rates head in the same direction as the 10-year treasury note yield, so a decrease in the yield means lower mortgage rates.
What about Treasury Yields?
When the economy is doing well, yields have to rise in order to attract investors. Supply and demand affect the price of bonds.
If the economy is strong, investors feel confident in investing in risky assets, so bond prices go down to attract investors along with higher yields for the future. Investors always want good returns on their money in exchange for putting their money in a long-term investment.
The 30-year mortgage rate works the same way. Investors will invest in mortgage-backed bonds if their return is attractive long-term, meaning mortgage rates have to rise.
As a result, a strong economy will often lead to high mortgage rates to attract investors. From the investor point of view, it is the reward for their opportunity cost of not investing in stocks in the foreseeable future.
When the economy is regressing, investors want to play it safe and invest in safer assets long-term. This would include bonds, meaning more investments in bonds that drive their price up now and yields down the line lower.
Again, if yields go lower, the mortgage rates will follow the same direction. High demand for bonds means higher prices, and no need for higher yields to attract investors.
As cruel as it may sound, the economy sort of has to be in between weak and strong in order for mortgage rates to be affordable for most people.
Interest Rates
The cost to borrow money affects mortgage rates as well. When the Fed increases interest rates, it increases the cost of borrowing money short-term.
It is important to remember that mortgage rates are long-term. Interest rates go up in the first place when there is inflation. It is meant to lower consumer spending so that supply and demand reach optimal levels, causing prices to go down.
Although interest rates aren’t directly correlated to mortgage rates, the two tend to follow the same direction. The Fed doesn’t know how long they need to keep interest rates high to cool down inflation, so it makes sense for mortgage rates to go up too.
Similarly, when interest rates start going down, so will mortgage rates in most cases.
**Higher House Prices = Lower Mortage Rates
You may be wondering what this even means.
First off, the concept of the 10-year treasury note yield was to articulate how bond prices and yields have an inverse correlation. This correlation is the same in real estate!
High demand for houses will increase house prices, which usually means mortgage rates will be lower. Remember, real estate companies (which are also investors) want to make a profit one way or another.
If the economy is doing poorly, investors will be investing in bonds, driving yields lower. A lower 10-year treasury note yield means lower 30-year mortgage rates.
House prices will likely remain high if the economy is shifting from a strong one in order to give property owners, like investors, a profit at the expense of lower mortgage rates.
Rarely in US history have house prices and mortgage rates been low at the same time, but it has happened.
The concept of interest rates was a way to highlight what else brings mortgage rates down. If interest rates are decreasing, that means inflation is also decreasing.
Lower inflation means the consumer has more purchasing power, meaning more people can afford to buy a house. Therefore, home prices have to go up when demand is higher than supply.
Higher prices for houses make it less attractive to buy a home, so mortgage rates go down to make it more attractive. After all, there are plenty of people who want real estate to be sold to make money.
***Lower Mortgage Rates > Lower House Price
THIS is the life changing advice when considering buying a home. It ultimately comes down to the individual.
Some people want a market where house prices are low, others want a market where mortgage rates are low. You’d be smart to wait for the latter.
Think about it like this, would you rather buy a home at a lower price but pay higher mortgage rates for the next 30 years? Or would it be better to borrow more money for a house, but at a lower rate for 30 years?
Now, this doesn’t mean that the house price shouldn’t be taken into consideration, but a lower monthly mortgage payment for the next 30 years sounds better than a higher monthly payment for a cheaper house.
The money NEEDS to be borrowed anyways!
It sucks to say, but the economy can’t be too strong in order for mortgage rates to be low. A weaker economy means investors will invest in bonds, driving yields and mortgages lower. It also means interest rates will be lower, to attract more borrowing and spending.
In conclusion, there are more factors that affect mortgage rates, but those factors are more tailored to individuals. The factors mentioned above are for everybody, no matter the income level.
Most people need to borrow money to buy a house. Thus, there is a cost that comes with that, called mortgages. People will save more money by borrowing money at a lower cost over the long-term rather than waiting for a home price to go down, and still borrow money.
Both price and mortgage rates are important to consider, but ultimately, mortgage rates are more important. When the time comes and the mortgage payments seem affordable, it is worth buying that house that took a lot of hard work and effort.
CONGRATULATIONS!
