Premiere Mortgage Services Inc. - Dana Bain


July 12th, 2016 2:47 PM by Robin Bain

Nothing stimulates the housing market like falling interest rates, and just because mortgage rates are low doesn't mean they won't go lower. A low mortgage annual percentage rate (APR) lets you afford to take out larger loans and buy costlier properties. As the 10-year Treasury note yield hit record lows last week, can a 3%, 30-year mortgage be in America's future?

The answer in part depends on how much of the rate windfall the banks intend to keep for themselves and how much they will pass on to their customers.

The measure of how well the banks are sharing the benefits of falling rates is a number called the mortgage rate spread. This is the difference between the national average interest rate on 30-year fixed rate mortgage (3.43% at the close of last week) and the yield on the 10-year Treasury note (1.3%). The spread has recently been growing and, at 2.07 percentage points, now stands at one of its highest levels since 2012. Now, that's great for banks' bottom lines, but not so much for yours.

True, new borrowers and refinancers benefit as rates fall. But by widening their mortgage-rate spreads, banks hope to capture more of the benefit for themselves. It's too easy to paint this as the greedy big banker sticking it to the little mortgage shopper.

The truth is a little subtler: banks are in a profit squeeze right now, and mortgage spreads are one of the few ways they can earn some money for investors and their executives.

The squeeze has to do with another spread; the margin spread. This is the difference of what banks charge their borrowers and what banks pay to depositors. With the interest rates on savings accounts already anaemic, the falling Treasury yields do not allow banks to slash returns on deposits any further in a bid to reduce their own cost of borrowing.

At the same time, falling rates mean that banks earn less interest on their loans. Fixed costs and lower revenues obviously do not make a banker happy to say the least. Expanding the mortgage rate spread will only go so far, too.

The upshot is that mortgage rates are "sticky" right now. According to the publisher of Inside Mortgage Finance, Guy Cecala, current mortgage rates should be about 0.2 percentage points lower than they are, based on the historical behavior of the mortgage rate spread.

Nonetheless, whenever mortgage APRs dip below 3.5%, it's a great time to take out a mortgage, since this is a fairly rare occurrence. According to the Mortgage Bankers Association, consumers are responding to the falling rates by increasing their mortgage applications, which were up 14.2% in the last week of June from the week earlier.

Paradoxically, it's the rise in demand that allows banks to keep their mortgage rate spreads fat. A 3% mortgage rate might be on the horizon if interest rates continue to fall, but first, demand for mortgages at their current rates will have to be exhausted.                                                                                                                                                                                 

At Premiere Mortgage Services Inc. we consistently Beat The Banks!  No Points & No Closing Cost Mortgages Available.

Call Dana Bain (NMLS # 18693) today at 978-422-2311



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Posted by Robin Bain on July 12th, 2016 2:47 PM


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