If you about to Buy a Home: Mortgage Rates Could Balloon After Wednesday Greece Outcome

First, How Mortgage Rates Work

Mortgage rates aren't made from thin air.

They come from the price of a mortgage-back bond that's bought and sold on Wall Street, and that has its pricing set in the same way as a stock does -- supply and demand. When demand for bonds is high, in other words, prices rise.

Rising prices means lower rates on mortgage for buyers and refinancing households.

By contrast, though, when demand for mortgage bonds is low, bond prices fall. This leads to higher mortgage rates for everyone.

The relationship between mortgage bond demand and mortgage rates holds for most types of loans including the conforming, FHA, USDA and "high-cost" conventional varieties. Jumbo loans are sometimes an exception.

Because mortgage rates are based on the price of mortgage-backed bonds -- as a rate shopper -- one of the most important questions you can ask your lender is "What is the mortgage bond market doing today?".

It's your best insight into where mortgage rates might go next.

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Mortgage Rates Sink On Economy, Greece

Since April, demand for mortgage bonds has been high; so high, in fact, that rates plunged to an all-time low, reaching sub-4 percent levels we never thought we'd see.

Get a jumbo 5-year ARMs under 3 percent with zero points? Really? Yes, really.

Mortgage ates have been low because investors need safe places to park their funds. Equity markets are unpredictable and global economies are on shaky ground, at best. And, when in doubt, investors move their money to the safest places they know.

Those places include the U.S. mortgage-backed bond market.

Mortgage rates have been down since April on weak, U.S. economic data and the likelihood of a Greece sovereign debt default. This is because the U.S. economy is a powerhouse and because a Greece default would send shockwaves throughout the Eurozone banking system.

In the U.S., as jobs data sank; economic output reduced; confidence dropped; and home prices idled this summer, demand for mortgage bonds picked up as investors fled stock markets, leading mortgage rates lower.

Greece's issues contributed, too. Markets were of unsure whether Eurozone leaders would offer a bona fide relief program to Greece, and as those doubts grew stronger, mortgage rates sank more.

But then an interesting thing happened.
Mortgage Rates Now "Single-Minded" On Greece

3 weeks ago, mortgage rates bottomed. It was the day before the October jobs report was released and it appeared unlikely that Greece would receive an aid package.

Since that date, however, the U.S. economy has shown signs of life.

The jobs market rebounded strongly, posting healthy gains
Home sales and homebuilder confidence rose nationwide
Retail sales and consumer spending outperformed expectations

To a recovering economy, these are all good signs. However, mortgage rates failed to rise to reflect that. Instead, markets remain captivated by what may -- or may not -- happen in Greece.

That mortgage rates are still low signals that concerns for Greece -- and the rest of the Eurozone -- have cast a long shadow on the mortgage bond markets. You can trace each day's mortgage rate movement to comments regarding Greece. The stock market is moving in kind.

Today's mortgage market has a one-track mind. As Greece goes, so goes mortgage rates.

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Rate Alert : Greece Aid Expected Wednesday

Wednesday, Eurozone leaders are expected to announce an aid package for Greece. This is the news for which mortgage markets have been waiting since April 2011. If the program is deemed "good enough", stock markets will soar and bond markets will sink.

This will take rates higher. Much higher.

There's too risk in today's market. If you're shopping for a mortgage right now, do the safe thing -- get your mortgage rate locked. Rates could certainly fall on Wednesday but, if they don't, it's Skyrocket City and you won't be happy if you're on that ride.

Get a mortgage rate quote online. Click here to get one free.
Author
Dan Green
About the Author

Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan atdan.green@waterstonemortgage.comor call 513-443-2020.