How To Predict Mortgage Rates

Mortgage rate photo

In order to accurately predict where mortgage rates are going, you'll need that proverbial "crystal ball" and the 20/20 eyesight that works so much better in hindsight.  Unfortunately, we have neither, but we'll try to give you some idea of how to figure this out.  

First, let's consider what factors are involved in setting mortgage rates.  Each individual mortgage company ultimately sets their own rates, but they generally don't stray too far from the crowd of other mortgage companies.  The following factors are important:

  • The rates on 10 year Treasury Notes - Because many mortgages are resold on the secondary market to investors, they need to have a slightly better rate of return; otherwise no one would buy them.  Investors are more willing to trust the US Treasury than some unknown guy down the street with a mortgage.
  • Inflation rates - Typically, as inflation rises, interest rates rise as well.  Again, this has to do with what the investors are expecting to receive.  As inflation goes up, investors want a better return to make up for inflation.  As inflation goes down, the reverse is true.
  • History - While we don't usually repeat the past exactly, we do have a tendency to mimic it pretty closely.  If a set of economic conditions resulted in a specific outcome, i.e. interest rate directions, we could reasonably expect similar economic conditions to produce a similar result.

Any number of professional investors, banks, and governmental units would love to be able to accurately and specifically predict the direction of the mortgage rates. For example, even knowing ALL the relevant data, you aren't going to be able to accurately predict whether rates are going to drop by ¼% or ½ %; or whether they'll go up next week or next month instead.  You may guess accurately occasionally, but the sheer volume of information that affects mortgage rates make that accurate guess still, a guess.

However, we can often generally determine where the market may be heading and the following will give you some help.

  1. Again, look at history.  If a past housing market meltdown resulted in higher interest rates - because of increased risk of defaults, you can generally expect that trend to repeat itself.  Conversely, if a hot housing market resulted in lower interest rates, again, history tends to repeat itself.  Remember though, that there are many, many unknowns that might skew a trend.  Look at other factors as well.
  2. Look at the projected inflation rate.  Probably one of the best sources is the Federal Reserve Board.  While they do set some key interest rates, they don't control how your individual mortgage company has to behave.  However, they do regularly indicate where they think inflation is headed.
  3. Watch what other big name lenders are doing.  If a major company announces plans to cut or raise mortgage rates, you can bet that the rest won't want to be too far behind.

Mortgage rates don't tend to have dramatic changes at any given time.  Their trends are slower.  So even if you weren't able to predict that the market was going to go up this time instead of down again, you still will probably only have a ¼ % change.


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