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Mortgage Rates Advertised on the Internet Are Also Inaccurate.

The problem with print ads is that they can be several days old. However, even the up-to-date advertisements that one can find on the Internet, those that can be updated within a few minutes, also fall victim to the same issue.

Here is the challenge with rates found on the Internet. The rates look good. Often, they look very, very good. So go ahead and do some homework to show you that I'm right. This weekend, pick up a newspaper and look at some mortgage rate quotes from lenders in your area. They'll be relatively low.

Now log onto a Web site and search for mortgage quotes. Those rates will be even lower than the ones you saw in the newspaper. Why is that, you wonder?

Just as companies that advertise in the newspaper must compete against their own local competitors using nothing more than interest rates, those that compete on the Internet must compete with the whole universe of mortgage lenders that also advertise on the Internet. Lenders who advertise in rate surveys must quote the lowest rate they possibly can—perhaps even rates that are lower than they can realistically offer. Why?

Because by the time you contact them, the rates may no longer be available. Are you skeptical?

I know how these things work. I've advertised on the Internet and in local newspapers. I've seen lowball quotes from other lenders that were simply unbelievable. I know how interest rates are set, and I read all the columns in newspaper articles and on the Web that are flat-out wrong.

Why all this confusion? Because mortgage rates can change by the second, and your lender knows it.

The Federal Reserve Has Little to Do with Your Mortgage Rate.

Mortgage rates aren't set by the government. They're not issued by the Fed. And perhaps the most often-quoted myth is that rates are tied to the

30-year Treasury bond or the 10-year Treasury note. Sorry, everyone, they're not. In fact, mortgage rates aren't set by any one person or organization; they're set by you and me. They're set by open markets that bid on the prices of various bonds—mortgage bonds.

Mortgage rates are tied to their specific index; 30-year rates are tied to a 30-year mortgage bond, and 15-year rates are tied to a 15-year mortgage bond. Conventional loans and government loans both have their indexes. And it's the selling and buying by public and private investors who are trading these bonds that set market rates. Let's explain this a little further by first seeing how bonds work in general. If you understand how bonds work, you'll understand both how and when rates are set. In fact, you'll probably know more about this process than your loan officer does.

Bonds are an investment vehicle, and unlike stocks, another investment vehicle, they are predictable. There is no guessing about what the price of a bond will be at its maturity. Perhaps the most familiar bond is the U.S. Savings Bond. And this is a good way to begin to understand how mortgage bonds operate.

If you were to go out and buy a $100 U.S. Savings Bond today, it would cost you $50 for a common series U.S. bond. No, you wouldn't able to buy a $100 bond for $50, then turn around and sell it the next day for $100. Instead, you would have to wait a certain period of time, predetermined by the bond maturity itself, before you could get that $100.

How long do you have to wait? It depends upon the bond. For a 30-year bond, you would have to wait until 30 years had passed to get your $100. That works out to just over a 3.00 percent return on investment. Not a whopping return like the one on your Google stock? No, not at all. But bonds aren't that type of investment; instead, they're considered more secure. You are guaranteed a rate of return over a specified period of time.

That's on a global, or "macro," level. On an individual, or "micro," level, here's what mortgage bond traders do all day long, every business day: They buy and sell mortgage bonds.

Since bonds are predictable, the return isn't that sexy. Instead, bond owners invest because of the guarantee; they don't want any surprises. But who would invest in a mortgage bond when there are other invest merit opportunities that could pay much more? Those who either don't like risk or want to offset the risk of other investments.

When the stock market is going crazy and it seems as if everyone is investing something in stocks and getting a great return, investors typically pull their money out of those staid bonds and use that cash to buy high-flying stocks. Remember the dot-com boom? Real estate?

Bonds must compete for those same investment dollars, and when money is pulled out of a mortgage bond to chase higher earnings elsewhere, the seller of those bonds must make adjustments in the price of the bond. The lower demand means that the price will be lower. And a lower price means a higher return, or yield, on that bond.

When there are fewer buyers of a fixed note, the sellers have to lower the price of that note to attract buyers, which also increases the yield on that note.

What causes a price to go up or down? The demand. If the stock market is tanking, then investors might want to sell stocks and put more money into the safe return guaranteed by bonds. But if more people want the same thing, then guess what happens? That's right, the price goes up because of the increased demand. A bondholder can get more money for the same bond. When the price goes up, the yield, or return, goes down.

On the other hand, if people pull money out of bonds and move it into stocks, it's because the economy is moving along at a good pace and investors expect a better return on stocks. When the price of a bond falls, the yield goes up.

One thing the Fed can do, although it rarely does so, is buy those mortgage bonds itself. When the Fed steps in and buys $50 billion in mortgage bonds, it keeps the price of those bonds up, holding rates down.

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