When you get ready to apply for a loan to buy a home or refinance your current mortgage, you're going to notice many unfamiliar terms popping up throughout the process. Don't stress!
In this series - we're giving you easy answers to your FAQ's so you feel confident and educated as you navigate the home mortgage process.
Today's frequently asked question
📊 What is the Bond Market?
The bond market is essentially a marketplace where people trade IOUs. When you buy a bond, you're lending money to someone - like the government or a company. In return, they pay you interest.
There are several different types of bonds.
US Treasury bonds are government bonds
Mortgage Backed Securities (MBS) are bonds as well, tied to mortgage cash flow
Municipal bonds finance local government’s operations, like cities and counties.
Corporate bonds finance large companies’ spending and investments.
All Bonds - unlike stocks - are deemed a fixed income investment – this allows investors to receive a schedule of repayments with interest.
💸 Why it matters for Mortgage Rates
Here's the deal: Mortgage rates and the bond market are connected.
When the interest rates on bonds go up ▲, mortgage rates often go up ▲ too.
When bond interest rates drop ▼, mortgage rates can go down ▼.
Keep in mind - Bond rates and stock market rates (often referred to as stock market performance) represent two different rates.
📉 Opposite Friends: Stocks & Bonds
The Stock Market and Bond Market often move in opposing ways. Why? When the stock market is doing well, it can suggest confidence in the economy. People are more likely to invest in stocks if they think the economy is growing because it will earn them more money. Less money is being invested in bonds so to attract investors, bonds will raise their rate of return - this means that mortgage rates go higher.
Conversely, a declining stock market can signal economic uncertainty, prompting investors to seek the safety of bonds. This means that bonds will lower their rate of return because of the supply of investors - this means that mortgage rates go down.
Mortgage lenders look at bond rates to figure out your mortgage rate.
🏦 The Fed's Role
The Federal Reserve, or "the Fed," is like the boss of this whole thing. They can change short-term interest rates, which can also affect mortgage rates. They do this to keep the economy healthy and help control inflation. The Feds also buy bonds to support the economy.
💡 What should you do?
Stay updated on the news about the economy and the bond market as you hunt for your dream home. Mortgage rates are just a piece of the puzzle, but understanding how they link to the bond market can help you make wise money choices.
Remember - rates change constantly. When you compare rates quoted by different companies, make sure you are comparing rates from the same day. Until you "lock" in your rate, it is not guaranteed.
Final Takeaway
Try not to get overwhelmed or follow the bond rates too obsessively. Work with your loan officer closely and ask plenty of questions. Your mortgage consultant is there to walk you through each step of the process and should give you a strategy that supports your short and long term goals.
And of course, you can always ask me questions at toni (at) toniryan.com
ABOUT THE AUTHOR
Toni F. Ryan | NMLS#230507
Senior Loan Officer | Peak Residential Lending
Toni F. Ryan has over 25 years experience in mortgage lending - both on the wholesale and retail levels. She believes that education is key to making the best decision for YOU! She shares her insight into the lending world here and encourages your feedback. Don't forget to connect on Facebook - Instagram and TikTok