Coronavirus and Mortgage Rates

 In Refinancing your Mortgage

You may have seen stories online, on TV, or in the newspaper about the spread of coronavirus causing mortgage interest rates to go down.  Ever wonder how a disease could make mortgage rates drop?

Here’s what you need to know.

How are Mortgage Rates Determined?

Mortgage rates in the US are determined by the demand for the mortgage bonds that are issued by Fannie Mae, Freddie Mac, and Ginnie Mae.  These three companies buy mortgages from all the lenders in the country, pool them together, and then securitize them, which means they turn them into mortgage bonds.  

A bond is a debt instrument, unlike a stock, which is an equity instrument.  That means if you buy a bond, you are buying some of the debt of a company. In return for buying the debt, the company pays you interest on your money.  On the flip side, when you buy a stock, you are buying a piece of the ownership of the company, and you make money if the value of the company goes up.

When Fannie Mae, Freddie Mac, and Ginnie Mae sell bonds, the money they make by selling those bonds is used to buy mortgages from lenders.  Then the lenders are able to lend that money to consumers. Lenders do this repeatedly, and that’s why they don’t run out of money. Here’s how it works:

How It Works:

  • A consumer wants to buy a house, but doesn’t have enough money in the bank to pay cash for it, so they go to a lender for a mortgage.
  • The lender sells the consumer a mortgage and the consumer buys the house.
  • The lender then sells the debt part of the mortgage to Fannie Mae, Freddie Mac, or Ginnie Mae, and the lender is able to lend that money to other consumers who want mortgages.
  • Fannie, Freddie, and Ginnie turn the mortgages into bonds, and sell the bonds to large investors.  Many of the investors are foreign governments.  
  • When you make your mortgage payment each month, some of the money goes to the company servicing your loan (your lender) and some of the money goes to whoever purchased the bonds that are backed by your mortgage.
  • Everyone is happy: you are happy because you have the money to buy a house, the lender is happy because they made some money when they sold you the mortgage, Fannie Mae is happy because they made money when they sold the bonds to the bond purchasers, and the bond purchasers are happy because they are getting some of the interest you are paying each month.  
  • The whole system is designed to get lots of cheap money into the hands of the lenders, so they can continue to sell mortgages and people can continue to buy houses.

How Coronavirus Affects Mortgage Rates

Now, here’s why something like coronavirus would affect interest rates.

If there is a large demand for mortgage bonds, Fannie Mae, Freddie Mac, and Ginnie Mae can auction off those bonds at a higher price.  Just like any auction, if there are a lot of bidders, the price of whatever the auctioneer is selling gets bid higher. In this case, Fannie, Freddie, and Ginnie are the auctioneers.  They own the bonds, investors want them, and if a lot of investors want them, the price goes up. With bonds, when the price goes up, the yield (the interest rate) goes down. So if everyone wants to buy mortgage bonds, mortgage interest rates go down.

At the moment, coronavirus is causing a lot of uncertainty in the global economy.  People aren’t traveling as much, they aren’t staying in hotels, they aren’t flying, they aren’t spending, and many companies in other countries have shut down factories, so they can’t sell as much.  All of that makes the stock price of those companies go down. If you’re not making money, why would anyone want to buy or own stock in your company?

What Should I Do?

Instead of buying stocks, investors are selling stocks.  When they sell stocks, they have a lot of extra cash, and they want to do something with that cash to earn some money, so they buy bonds.  If many investors suddenly want to buy bonds, the demand for the bonds goes up, the price of the bonds goes up, and the yield (the interest rate) for those bonds goes down.

So, as coronavirus spreads, mortgage interest rates go down.  It’s important to note that they won’t just keep going down forever, though.  There are a lot of people who need to get paid when you get a mortgage: the lender who sells you the loan, Fannie Mae, and the investor who buys the bonds issued by Fannie Mae, to name just a few.  Although rates have dropped quite a bit, they won’t go down much lower because there just won’t be enough profit in it. Lenders are not stupid. They make money by selling you money. No sensible lender is going to give money away for free.

What can you do with this information?  The obvious thing if you already have a mortgage is to refinance that mortgage into a new loan with a lower interest rate.  

Need to know how to do that without making a bad decision?  Contact us today and we’ll show you how easy it is to lower your payment.

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