Banks Keep Mortgage Rates Steady

Despite the drop in government bond yields, lenders keep mortgage rates just over 3%

Banks Keep Mortgage Rates Steady
July 8, 2016

Although government bond yields dropped in the past week, lenders have continued to hold mortgage interest rates steady. On Thursday, the 10-year yield on bonds dropped to 1.387 percent, while the average interest rate for a 30-year fixed mortgage was 3.41 percent. The difference of 2.02 percent is higher than it has been since the middle of 2012, meaning lenders are making a decent profit from their loans.

When bond yields drop, lenders decrease their interest rates. Lenders are unable to lower the cost it takes to make loans, though, meaning that their profits fall. By keeping interest rates high despite the drop in bond yields, they continue to offset these costs and make a small profit. In 2012, when bond yields were at such low rates, lenders lowered interest rates but made certain that they would be able to cover their costs.

According to Inside Mortgage Finance publisher, Guy Cecala, if interest rates were following bond yields in the normal way, interest rates would currently be around 3.25 percent at the highest. If the difference between interest rates and bond yields was at its ten-year average, the average mortgage rate would be around 3.17 percent.

While lenders are holding rates steady enough not to lose money, some wonder if they will be able to continue or if they will have to drop rates even lower.

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