Did you know that the Federal Reserve DOES NOT set the rate most borrowers get on their mortgages? Stop being misled by the media; read on to see how rates really are set, and what makes rates move!

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Dear BuildingCredibility.com reader:

This will shock many of you...mortgage interest rates ARE NOT set by the Federal Reserve. They are also NOT tied directly to the yields of US Treasury bills, bonds, or notes. Despite what you read or see in the media, mortgage interest rates are actually set by lending institutions, and are based on the trading and performance of morgage-backed securities.

For many years, the media and inexperienced loan officers everywhere have suggested that the 10-year Treasury Note, considered by most a benchmark to follow, is directly tied to mortgage interest rates. Others have gone so far as to suggest that the two are separated by a specific interval. These claims are simply not true.

If you look at the following graph, you can see a 13 month track of interest rates for 30-year fixed rate mortgages and the yield for the 10-year Treasury Note. Also mixed in is the Federal Funds rate, which is set by the Federal Reserve. Clearly, there is no DIRECT relation between mortgage rates and the yield on the 10-year Treasury Note.

At first glance, it is easy to see why that mistake can be made. For 11 out of the 13 months recorded in the graph, the rates followed a similar path. However, look at the drastic change that occurred between January and March of 2008. What's interesting about this chart, is that during the period from September 2007 thru March 2008, the Federal Reserve cut interest rates six times. And despite those cuts, mortgage rates were actually higher in March 2008 than they were a year before. This shows that mortgage rates are not tied to the 10-year Treasury Note, and are also not set by the Federal Reserve.

If you have additional questions about mortgage interest rates, and what makes these rates change, feel free to call or email me at (208) 880-0316 and eric@ericsloans.com. You can also visit my website at http://www.ericsloans.com.