Private note investors know well in advance their rate of return on a particular investment. The interest rates are hard-wired into the note. For those who are financing smaller purchases such as a single family home or a rental property, knowing stocks bonds real estatein advance what the rate will be takes a bit more effort as well as some luck. How is that? Banks that provide mortgage loans to borrowers peg their interest rates on a specific mortgage bond that is traded throughout the business day and as such is a moving target. Borrowers cannot get any rate guarantee until they directly lock in a prevailing interest rate for a long enough period of time to close on a transaction.

Mortgage rates are directly associated with an accompanying mortgage bond and just like any other bond yields can rise or fall based upon the price of the bond. It’s a common myth that mortgage rates are tied to the 10-yr Treasury but that’s simply not true. What is true is that bonds rise and fall in price which directly affects the interest rate. The greater the demand for a bond, which would indicate a flight to safety, the higher the price for that bond resulting in a lower rate.

Banks have a specific division that closely monitors mortgage bonds and set their mortgage rates accordingly. That’s why rates can change from day to day and until a borrower makes a direct request to the bank to lock in that rate for say 30 days the borrowers face the whims of the market. There’s really no way to predict what an interest rate on a 30 year mortgage will be two weeks from now. Perhaps there will be trends but mortgage bond traders react quickly to market news and by the time a borrower decides to lock in a rate it’s quite possible the rate has moved from its previous mark. Sometimes the rate falls and it’s good news the rate changed but in today’s environment it’s more likely the rate will go up.