Foreign Markets Impact on U.S. Mortgage Rates

You may not think foreign markets have anything to do with obtaining a mortgage for your future home. However, a lot goes in to determining mortgage rates and that includes foreign economies as well. Having a good understanding of how foreign markets affect mortgage rates will allow you to potentially make a better informed decision about when and what type of mortgage you would like to obtain.

The basics

When a loan is originated it is then paired with similar loans and sold into the secondary mortgage market as mortgage-backed securities. These mortgage-backed securities are then sold to investors. There are many investors in mortgage-back securities including pension funds, insurance companies, and foreign governments.

The rate at which these securities are bought by investors determines both the price the new loans will be sold for and the interest rates that will be offered to consumers.

Do investors solely determine mortgage rates?

Investors play a large role in determining mortgage rates because the price they pay for mortgage-back securities now will affect the future price of the securities, which then cycles back to the rate being offered to consumers.

However, there are a couple of other factors that have an impact on mortgage rates including the London Interbank Offered Rate, or LIBOR, which affects adjustable-rate mortgages, and the U.S. Treasury bonds, which affects fixed-rate mortgages.

What does this mean?

Adjustable-rate mortgages

LIBOR, which has a direct impact on adjustable-rate mortgages, is used as a reference point for borrowing and lending around the world, including the United States. If you have an adjustable-rate mortgage and LIBOR is down when the mortgage rate resets, your overall monthly payment will be lower. Your payment will be higher if LIBOR is higher.

Fixed-rate mortgages

The price of a mortgage-backed security of a 30-year mortgage will move with the price of the U.S. Treasury five year note or 10-year bond based on a financial principal known as duration. This means the interest rate offered to consumers for a fixed-rate mortgage will move up or down according to the U.S. Treasury bond which is also effected by economic expectations.

Making a better informed decision

All in all, to a certain extent, foreign markets and foreign investors have an impact on the amount you will pay for your mortgage. In fact, almost 45% of U.S. Treasury securities and just under 20% of U.S. Agency securities (bonds and mortgage-backed securities) are currently held by foreign investors which could be helping to reduce mortgage interest rates. Having a basic understanding of how U.S. mortgage rates are determined may help you make a better informed financial decision.