Expensive oil could push mortgage rates higher
As we are well aware, the prices of oil and gas are on the rise, reflective of inflationary pressures. One gallon of gas is pushing $4 and a barrel of oil now commands $120. The immediate effects that these increases have on your wallet and bank account are obvious. The ripple effects of such increases have also been accurately portrayed by the media and reach as far as the tourism industry, the cost of most goods and the price of a meal at your local diner. By definition, this is known as inflation. Make no mistake about it, inflation also negatively affects mortgage rates.When it boils down to it, mortgage interest rates are dependent upon the sale of mortgage-backed securities, or bundles of closed loans, on the secondary markets. Secondary markets for these securities operate just like those for bonds or CDs or any other fixed-rate commodities, meaning that the bundles of closed loans are sold for a fixed rate of return.With any fixed-rate investment, inflation (or the rising costs of goods and services) erodes the buying power of that commodity and diminishes its value. Mortgage-backed securities are no different, and their fixed rate of return also becomes less and less valuable as inflation rises. Therefore, when inflation is rising and seen as an imminent threat, secondary investors or buyers of mortgage-backed securities want a higher rate of return on the investment before they will buy. When this is the case, the only way to keep the cycle going and give secondary investors a higher rate of return is to increase mortgage rates at the consumer level. If increased inflationary levels are indeed present in todays economy, a rise in mortgage rates can be foreseen due to these outlined circumstances. Effects of the current prices are still working their way through the national and global economies. Inflationary levels are not necessarily astronomically high right now which bodes well for current mortgage rates. However, it does take time for some of these price changes and fluctuations to mortgage rates to take place. In order to provide the best advice and service, a mortgage professional must be educated and aware of the current economic conditions as well as what is around the next bend or two. William A. DesPortes is a managing member of DesPortes, Selig & Associates, Professional Mortgage Services. He can be reached at 970-926-9393 or firstname.lastname@example.org.
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