In good news for homeowners, interest rates have dropped, which is partly dictated by the U.S. Department of Treasury. In 2016, the treasury note fell after Great Britain’s decision to flee the European Union scared investors. But it rebounded when Donald Trump was elected president; investors felt hopeful that he’d provide a boost to the economy. It spiked once more when the feds raised rates, but it has begun to fall once again.
U.S. Treasury bills (as well as bonds and notes) affect interest rates on fixed-rate mortgages; when treasury yields go up, so do interest rates. The reason for this is that investors seeking a solid and secure return compare interest rates to other fixed-income products. Some of the items in this comparison include money market funds, certificate of deposits, home loans, and corporate bonds. Each of this type of yield competes for the same kind of investor, making it related and causative.
How treasury notes work
According to the Balance, treasury notes are among the safest type of investment because they’re guaranteed by the U.S. government. Other investments come with risk (albeit the risk is slight for CDs and the like). The Treasury sells these bonds to help pay the national debt.
Treasury notes come with different terms: two, three, five, and ten years. Bonds are issued in 30-year terms while bills are issued in one-year terms (or less).
The yield changes daily for treasury notes. Investors resell them in secondary markets and that affects their value. It does this by applying the basics of supply and demand: when there isn’t high demand for the notes, their value drops (and yields increase). This isn’t good for homebuyers – it makes the purchase process more expensive because it raises interest rates.
When the demand is high, on the other hand, mortgage rates fall, which allows homebuyers to purchase homes they might not be able to afford otherwise. This also primes the housing market by flooding it with potential buyers. For people who already own homes, these lower rates make a second mortgage a possibility, which allows homeowners to do things like finish their basements, purchase new roofs, and remodel their bathrooms.
All of this requires spending, which strengthens the economy.
How your interest rate is influenced
As mentioned above, the U.S. Treasury affects fixed-rate mortgages (and only mortgages that are fixed-rate). The 10-year note impacts 15-year loans while the 30-year note impacts 30-year loans. The Federal Reserve plays a role, too, but in mortgages that are adjustable-rate.
The way they do this is by setting a target rate for the fed funds. This is the rate banks charge each other for the loans they need to maintain a certain level of reserve (which is a requirement). The fed funds impacts LIBOR, three-month loans, six-months loans, and prime-rate loans, including adjustable-mortgages.
When interest rates are low, it’s the best time to buy. That makes right now a good time to jump if you’ve toyed with taking the plunge into home ownership.
By Michaela Phillips, Guaranteed Rate, Inc. Michaela Phillips is the Vice President of Mortgage Lending at Guaranteed Rate, Inc. Contact Michaela at 303.579.5517, e-mail [email protected] or visit michaelaphillips.com. NMLS:312874.