The Relationship Between Mortgage Bonds & Mortgage Rates

Today, I wanted to share something about the Bond Chart with you and how it relates to mortgage rates. Because the Bond Chart, not the rate set by the Federal Reserve, is the true key to understanding mortgage rates. 

The Bond Chart has an Inverse Relationship to rates: the higher the bond price, the lower the rate.

To clarify, these are Mortgage Bonds we’re talking about.

Lenders create mortgage loans, and these are packaged together in large quantities into these Bonds. These then provide monthly payments to whoever owns them. 

When demand for these Bonds is high, lenders supply this demand by offering more Bonds. In order to do this, they need more people to take out mortgages.

To encourage more people to take out mortgages, lenders lower rates.

When demand for Bonds is low, mortgage rates go up, because mortgage lenders need to entice investors to buy their mortgage bonds.

In essence then:

Demand for Mortgage Bonds is high, rates are lower.
Demand for Mortgage Bonds is low, rates are higher.

This creates fluctuations in the mortgage interest rates.

This Bond Chart is always about one week ahead of the news. Whatever you hear in the news has a lag of at least one week.

Ways you can lower you rate:

1)    Most Mortgage Brokers / Lenders / Banks work on “Lender Paid Compensation.” You can get a lower interest rate by foregoing this option. 

 Lender Paid Compensation refers to how a mortgage broker gets paid. It means that the lender pays the mortgage broker’s fee by building this fee into the rate of the loan. This gives the appearance that you pay “zero points,” i.e. no mortgage broker fee. But in reality, the fee is simply built into your loan, out of your view, by raising your interest rate—sometimes by as much as a whole percentage point (1%) or more. In the vast majority of cases, this means that you will be paying A LOT more money in the long run while you make payments on your loan over the years. 

We do offer loans with Lender Paid Compensation, but we also offer the option of using Borrower Paid Compensation. Borrower Paid means that you (the borrower) will pay us a small broker fee at the time of closing, but your rate will not be inflated on the back end. Because the difference in the rate is so great, 99% of our clients choose the Borrower Paid option. 

2)    Most Mortgage Brokers / Lenders / Banks do not offer true Discount Points.

“Discount Points” means a percentage of the loan amount that you pay at the time of closing, in exchange for which the lender will give you a lower rate. This is also called “buying down the rate.” Lenders have tables that show you how much lower your rate could be at different amounts of money paid upfront, and you can choose one of these options. 

For compliance reasons, this “discount point” amount can usually not exceed more than 1 percent of the loan amount. So on a $1M loan, you can usually not pay more than $10K in order to get a lower rate. This limits how far down your rate can go.  

Now since the model of 99% of mortgage brokers follows Lender Paid Compensation, the “Discount Points” you pay are not really discount points—you are really paying to compensate for their commission. In other words, you are buying down the inflated rate which has the mortgage broker commission built in (out of your view). 

In our model, with Borrower Paid Compensation, there is no inflated rate and the Discount Points you pay go 100% to lower your rate. For this reason, we get truly some of the lowest rates in the business. 

3)    We help you get everything prepared so you are ready to lock your rate at the most optimum moment. 

Rates change 3+ times per day. When they hit a low point, they stay there for about 6-12 hours before they go up again.

If your loan is ready and in the lender’s system, we can lock that lower rate as soon as we see it.

Preparing a file to lock takes about 2 days, and this is why most people miss the window of opportunity. Years ago, you could lock a rate immediately just with an address and a social security number. Today I know of only one lender that allows this, but they don’t have the best execution on actually closing the loan after the application stage.

By being prepared and ready, we can lock.

I am here if you need any help.