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Why Do second
mortgage Rates Change?
To understand why second
mortgage rates change we must first ask the more general question, "Why
do interest rates change?" It is important to realize that there is not
one interest rate, but many interest rates.
Prime rate: The rate offered to a bank's best customers.
Treasury bill rates: Treasury bills are short-term debt instruments used
by the U.S. Government to finance their debt. Commonly called T-bills they come
in denominations of 3 months, 6 months and 1 year. Each treasury bill has a
corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate)
Treasury Notes: Intermediate-term debt instruments used by the U.S. Government
to finance their debt. They come in denominations of 2 years, 5 years and 10
years.
Treasury Bonds: Long-debt instruments used by the U.S. Government to
finance its debt. Treasury bonds comes in 30-year denominations.
Federal Funds Rate: Rates banks charge each other for overnight loans.
Federal Discount Rate: Rate New York Fed charges to member banks.
Libor: London Interbank Offered Rates. Average London Eurodollar rates.
6 month CD rate: The average rate that you get when you invest in a 6-month
CD.
11th District Cost of Funds: Rate determined by averaging a composite
of other rates.
Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of
second
mortgage rates, creates securities with them, and sells them as Fannie Mae-backed
securities. The rates on these securities influence second
mortgage rates very strongly.
Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of
second mortgages, secures them and sells them as Ginnie Mae-backed securities.
The rates on these securities influence second
mortgage rateson FHA and VA loans.
Interest-rate movements are based on the simple concept of supply and demand.
If the demand for credit (loans) increases, so do interest rates. This is because
there are more buyers, so sellers can command a better price, i.e. higher rates.
If the demand for credit reduces, then so do interest rates. This is because
there are more sellers than buyers, so buyers can command a lower better price,
i.e. lower rates. When the economy is expanding there is a higher demand for
credit, so rates move higher, whereas when the economy is slowing the demand
for credit decreases and so do interest rates.
This leads to a fundamental concept:
Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower
rates).
Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher
rates).
A major factor driving interest rates is inflation. Higher inflation is associated
with a growing economy. When the economy grows too strongly, the Federal Reserve
increases interest rates to slow the economy down and reduce inflation. Inflation
results from prices of goods and services increasing. When the economy is strong,
there is more demand for goods and services, so the producers of those goods
and services can increase prices. A strong economy therefore results in higher
real-estate prices, higher rents on apartments and higher second
mortgage rates.
second
mortgage rates tend to move in the same direction as interest rates. However,
actual second
mortgage rates are also based on supply and demand for second
mortgage rates. The supply/demand equation for second
mortgage rates may be different from the supply/demand equation for interest
rates. This might sometimes result in second
mortgage rates moving differently from other rates. For example, one lender
may be forced to close additional second mortgages to meet a commitment they
have made. This results in them offering lower rates even though interest rates
may have moved up!
There is an inverse relationship between bond prices and bond rates. This can
be confusing. When bond prices move up, interest rates move down and vice versa.
This is because bonds tend to have a fixed price at maturity––typically
$1000. If the price of the bond is currently at $900 and there are 10 years
left on the bond and if interest rates start moving higher, the price of the
bond starts dropping. The higher interest rates will cause increased accumulation
of interest over the next 5 years, such that a lower price (e.g. $880) will
result in the same maturity price, i.e. $1000.
Benefits of Second Mortgage Rates
- No Equity required
- Don't need to touch your existing Low rate 1st mortgage
- Tax Deductible
- Consolidating Debts will Lower Your Monthly Payments
Program Highlights
- 125% Second Mortgage
- 1st Time Homebuyers OK
- Poor Credit OK
- No Verification Income Loans
- Self Employed Borrowers OK
- Interest Only Loan Options
- Home Equity Lines of Credit
How to find the best Second Mortgage Rates
Free Mortgage Quote
No obligation & No cost
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