Most consumers don't understand the admittedly byzantine convolutions of the way mortgage rates are calculated. The first thing you must understand is that there are many different interest rates that together affect your overall mortgage rate, including the following:
·Prime Rate: offered to the bank's best customers
·Treasury Bill Rate: Short-term debt instruments with interest rates set by the U.S. Government and used to finance the government's debt. Treasury bill rates are calculated on the period the bill is good for (3-month treasury bill rate, one year treasury bill rate)
·Treasury Notes: Intermediate-term debt instruments similar to treasury bills
·Treasury Bonds: Long-term debt instruments similar to notes and bills; these come in 30-year denominations.
·Federal Funds Rate: Influenced by the US government, this is the rate banks charge one another for overnight loans
·Federal Discount Rate: Set by the US government, this is the rate the New York Fed charges to member banks and directly influences the Federal Funds Rate.
·LIBOR: London Interbank Offered Rates, overnight loans charged on London Eurodollars
·6-month CD rate: Average interest rate on a six-month certificate of deposit
·11th District Cost of Funds: Rate determined from an average of several other rates
·Fannie Mae-Backed Security Rates: Bulk securities from Fannie Mae-held mortgages, these securities rates directly influence national mortgage rates
·Ginnie Mae-Backed Security Rates: Bulk securities similar to the Fannie Mae securities, but held on FHA and VA loans.
Fluctuating interest rates are based on supply and demand. If the demand for credit goes up without the supply of credit increasing, interest rates also go up. When the economy expands, there's a higher demand for credit, so interest goes up; when the economy is slow the demand decreases. Manipulations in the Federal Reserve rate, as shown by Alan Greenspan over the last decade, can moderate or even reverse these trends.
However, in general a slowing economy is good news for the consumer in lowered interest rates, while a growing economy is bad news for the consumer, with highr interest rates. High inflation generally signifies higher interest, and it is in response to this that the Federal Reserve rate will be manipulated to slow the economy down and reduce the pace of inflation.
Mortgage rates also tend to move in the same direction as interest rates, but the actual numbers are based on mortgage supply and demand, which can be quite different from the rest of the consumer market.
Bond prices and bond rates are inversely related – when prices move up, interest rates move down. That's because the maturity price is attached directly to the interest rate. A bond that matures at $1000 is purchased at a lower price; the higher the interest rate on that bond, the lower the price will be.
