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Chris Kaufmann

Licensed in Iowa
Keller Williams Greater Quad Cities

3580 Utica Ridge Rd.
Bettendorf, IA 52722

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How Are Mortgage Rates Set?

Although there are a slew of different factors that affect interest rates, the movement of the 10-year Treasury bond yield is said to be the best indicator to determine whether mortgage rates will rise or fall. But why?

Though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years, so the 10-year bond is a great bellwether to measure interest rate change. Treasuries are also backed by the "full faith and credit" of the United States, making them the benchmark for many other bonds as well.

Additionally, 10-year Treasury bonds, also known as Intermediate Term Bonds, and long-term fixed mortgages, which are packaged into mortgage-backed securities (MBS), compete for the same investors because they are fairly similar financial instruments.

However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as payment default and early repayment, and thus carry more risk and must be priced higher to compensate.

How will I know if mortgage rates are going up or down?

Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don't confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

  • 10-year bond yield up, mortgage rates up.
  • 10-year bond yield down, mortgage rates down.

So a good way to predict which way mortgage rates are headed is to look at the 10-year bond yield. You can find it on finance websites alongside other stock tickers, or in the newspaper.  If it's moving higher, mortgage rates probably are too.  If it's dropping, mortgage rates may be improving as well.

To get an idea of where 30-year fixed mortgage rates will be, use a spread of about 170 basis points, or 1.70% above the current 10-year bond yield. This spread accounts for the increased risk associated with a mortgage vs. a bond. So a 10-yr bond yield of 4.00% plus the 170 basis points would put mortgage rates around 5.70%. Of course, this spread can and will vary over time, and is really just a quick way to ballpark mortgage interest rates.

There have been, and will be periods of time when mortgage rates rise faster than the bond yield, and vice versa. So just because the 10-year bond yield rises 20 basis points (0.20%) doesn't mean mortgage rates will do the same. In fact, mortgage rates could rise 25 basis points, or just 10 bps, depending on other market factors.


Davenport, IA Ranks 3rd As Americas Best Riverfront

Voting is in and Davenport, IA has been named by readers of and USA Today as number three in Best Riverfront Towns. Rounding out the number four spot was yet another Iowa town named Dubuque, IA. A huge congratulations to both cities as I know both towns have centered many of their  improvements along the mighty Mississippi River - even despite it's seemingly annual flooding. Davenport IA Riverfront

As a previous boater (I still like consider myself a boater even though I dont currently own a boat) this ranking probably means a little more to me than the average citizen. I have always appreciated what the riverfront in Davenport and surrounding area has had to offer. And since I've also boated up to and around Dubuque IA I can certainly agree with popularity of the riverfront area there. Makes me want to go buy another boat.

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