News by Subject
Complete list of specialty news sections.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Mortgage Industry News
Subscription-based news for people who work in real estate finance.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from

Mortgage News Reprints
Put entire stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed stories for your web site or for your RSS reader.

News Archives
Archive of news entries.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Graphs
Directory of lenders, branch operators and mortgage service providers.
home advertise email RSS about us
HOT Topics Rates Glossary LO License Search
Consumer Mortgage News
Free mortgage news for current and prospective borrowers from a leading online mortgage industry news publication.

Understanding Interest Rates on Mortgages

Ins and outs of home loan rates

May 17, 2018

By JACK GUTTENTAG The Mortgage Professor (Tribune News Service)

Why have mortgage interest rates been creeping up over the last few months?

Recent declines in unemployment to rock bottom levels and the accompanying increase in the inflation rate have induced the Federal Reserve to tighten credit in order to dampen further price increases.

The process will continue until the emergence of the next recession, which is overdue.

What interest rates predict the direction future mortgage interest rates will take?

Before the development of secondary mortgage markets, there was an answer to this question. Changes in mortgage rates lagged changes in corporate bond yields by anywhere from two to eight months.

Today, however, the mortgage market is so thoroughly integrated into the broader capital market that there are no leading indicators of mortgage rates. Mortgage rates and bond yields change together.

A large proportion of all mortgages are placed in pools against which mortgage-backed securities are issued. MBS trade actively in the market and are considered close substitutes for bonds. Any change in bond yields, therefore, is transmitted instantly to the MBS market.

Mortgage loan originators, in turn, base their rates primarily on yields in the MBS market. Originators usually post their rates at about 11 a.m. EST, after they see the opening yields on MBS that morning.

What are the legitimate and illegitimate reasons why Jones gets a lower mortgage rate than Smith?

The legitimate reasons are embedded in the rate sheets lenders produce daily for their loan officers.

Assuming Jones and Smith deal with the same lender, these reasons include the following:

  • Jones paid points _ an upfront charge _ to reduce his rate where Smith did not.
  • Jones had a significantly lower credit score.
  • Jones' loan is secured by his primary residence whereas Smith is borrowing to finance an investment property.
  • Jones' property is a single-family unit whereas Smith's is a duplex.
  • Smith is taking "cash out" of a refinance, whereas Jones isn't.
  • Jones is willing to set up an escrow account with which the lender will pay taxes and insurance whereas Smith is not.
  • The rate on Jones' loan was set on Monday whereas Smith didn't lock his rate until Tuesday after market rates had risen.
  • Smith needs a 60-day rate lock whereas Jones needs only 30 days.

If Jones and Smith deal with different lenders, they may be quoted different rates on the same deal just because one of the lenders is pricing more aggressively that day. I would not call that rate difference "illegitimate"; it is the way the system works. In today's market, those rate differences are small.

Prior to the financial crisis, illegitimate rate differences arose out of the efforts of some loan officers to induce vulnerable borrowers to pay a rate above the rate set by the lender in its price sheet. Revisions to Truth in Lending have since eliminated that practice.

Since my mortgage interest charges are more than covered by the return on my common stock, is there a good reason for me sell the stock to pay off the mortgage?

Over long periods, you will probably earn considerably more on a diversified portfolio of common stock than you will pay on a mortgage, which is the argument for retaining your stocks. There is a risk, however, that you could earn less.

To add some precision to this generalization, I recently used the Ibbotson database of stock returns published by Morningstar to calculate rates of return over every 10, 15, 20 and 25-year period during the 87 years ending in 2012. The average return during the 924 10-year periods was 10.52 percent, with a high of 21.43 percent and a low of minus 4.95 percent. The rate of return was negative during 52 of the 10-year periods.

In contrast, over the 744 25-year periods, the average return was 11.34 percent, with a high of 17.26 percent and a low of 5.62 percent. The return was positive in every single 25-year period.

The moral is clear. Accumulating stock in your early working years while you are paying off a mortgage is a good idea because time is your ally. As you approach retirement, the risk grows that your stock portfolio will take a nose dive that leaves insufficient time for a recovery. To avoid that, you want your mortgage to be retired first, preferably from additional savings but from sale of the stock if necessary.

About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

next story

back to home page

To see more of The Mortgage Professor or to subscribe to the newspaper, go to

Copyright (c) 2018, The Mortgage Professor

Distributed by Tribune News Service.

This story was distributed by TNS - Tribune News Service
Refinance News
News about refinance programs, pricing and production.
H A R P 2.0 News
News stories about the H o m e Affordable Refinance Program including expanded program guidelines.

Copyright © 2016 Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

pricing engine directory

wholesale lender directory

More Mortgage News Resources ( full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

free mortgage news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter


mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

refinance news

reverse mortgage news

sales blog

secondary marketing

servicing news

subprime news

wholesale lenders

wireless mortgage news