Historic Mortgage Rates
Most people assume that mortgage rates are derived as a result of the Federal Reserve’s movements in the federal funds rate. This is the interest rates that banks charge each other when borrowing money. When you hear that interest rates were lowered or raised by the Fed, this is the number they’re referring to. This rate only has an indirect effect on mortgage rates. The fed funds rate affects a lender’s borrowing costs. When the fed cuts rates, banks pay less for the money they need to finance loans. So now they can reduce the interest rates they charge on mortgages without hurting their profit margins.
The key determining factor for determining mortgage rates is actually the 10 year treasury note yields. The reason being, on average people tend to pay off mortgages about every 10 years. This is typically via a home sale or a refinance. Because mortgages carry a greater risk to banks and investors than a treasury note does, higher interest rates are charged for mortgages. Mortgages can default where treasury notes are essentially risk free. Historically the spread between mortgage rates and 10 year treasury notes has been about 1.5%. This spread is called the risk premium. Like anything, there are other factors involved with setting mortgage rates, just keep in mind that they really track the 10 year treasuries.
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