RELATIVE INTEREST

One of the most common questions that people ask me is...

"What causes Home Loan rates to go up or down?"

The answer, unfortunately, is not exactly straightforward. The economy is a complex animal, and there are many factors that influence Home Loan rates.

Home Loan rates are influenced on a daily basis more by Market perception than particular numbers or data. Rates can change daily, and sometimes even during the course of a day based on economic events that happen throughout the day. Generally speaking, if commentary by key Government Agencies or Economic Data that is released indicates a weaker economy, Home Loan rates will get better during that day. If commentary hints toward a strengthening economy, Home Loan rates will get worse.

Here are a few of the most important economic indicators that are released each month:

• Consumer Price Index- A measure of the average price level paid by consumers on over 200 goods and services.
• Retail Sales- A measure of total receipts of retail stores, adjusted for seasonal variations.
• Chicago PMI- Opinion surveys of over 200 Chicago purchasing managers regarding the manufacturing industry.
• Employment Report- Measures of Jobless Claims, Continuing Unemployment Claims, Hourly Earnings, and Job Creation.
  

So why do these indicators influence Home Loan rates?

Home Loans are backed by Mortgage Bonds. Bonds are safe investments in difficult economic times because they offer investors a safe, predictable, rate of return. So, when the economy is weak, investors tend to put their money in bonds and pull it out of riskier investments such as the Stock Market. As the demand for Bonds goes up, Bond issuers do not have to pay as high of a yield to attract investors, hence Bond yields fall. Since Home Loan rates are tied to Mortgage-backed Bonds, Home Loan rates therefore fall.

The opposite is true when the economy is hot. Investors are flocking to the stock market and other riskier investments in an attempt to make a greater return on their money. Therefore, bond issuers must offer higher yields in order to attract investors to their lower-yield alternative. Hence, Home Loan rates rise.

Another important thing to understand is how inflation influences Home Loan rates. Inflation erodes the value of the Dollar, and hence, erodes the value of a long term investment relative to today's Dollars. Mortgage companies must charge higher interest rates in order to offset the long term economic effect of the erosion of the value of their investment which is backed by mortgage bonds. Therefore, when inflation is higher than "normal," Home Loan rates tend to go up.

One common misconception that must be addressed in this article is that when the Federal Reserve Board raises rates, Home Loan rates correspondingly go up. This is a myth and is simply not true. When the Federal Reserve raises rates, they are raising the Federal Funds Rate- the interest rate on overnight loans between Banks. The Federal Funds Rate is not tied to Home Loan rates. More important is the commentary of the Federal Reserve and the market perception of their stance on the economy. For that reason, the mortgage world watches closely when Ben Bernanke speaks or when the FOMC minutes or other commentary from their meetings are released.

Therefore, Interest Rates are relative. A lot of PEOPLE get concerned when interest rates go up however Interest Rates are Relative.

 

All the more reason that it is in your best interest to separate Equity from your Home regardless of the Real Estate environment?

• Over 30 years, Interest Rates are relative.

• When Interest Rates are high, they are high for earning; when they are low, they are low for earning.

• Regardless of Interest Rates, using Tax-free Equity and putting it in Compounded Earning Investments puts that differential to work for you.

• Separating Equity gives you liquidity in case of disaster.

• Separating Equity secures Equity even if Home values go down.

• Executing proper Equity Management using maximum Tax advantage Insurance contracts allows you to participate in Stocks, Bonds and Real Estate while protecting Principle.

• Baby Boomers, in particular, need to be able to turn some of the lazy Equity in their Homes into sources for Retirement Income.
 

There is no need to be panicking based on daily headlines. It is their job to sell papers.

My job is to help families identify their stewardship responsibility to true wealth. By combining a rich educational background and practical insight gained from business development, financial and estate planning, and advanced business and tax planning.