As the first quarter of 2008 is coming to an end, interest rates are still more volatile than in the past few decades. According to an article from the Raleigh Real Estate News, recent past interest rates for home loan rates for prime borrowers would move 1/4 or 1/2 in discount points per week, roughly 1/16% or 1/8% in rate. However, now that move occurs in a single trade. This kind of volatility has led to nothing short of chaos in lending communities where the interest rates change as much as four or five times in a single day.

Why is There So Much Volatility?

According to the Raleigh Real Estate News article, the volatility is caused by two main reasons. First of all, liquidity issues are forcing many banks to sell prime assets in order to raise cash for battered balance sheets and inflationary pressures that are rising. Additionally, as we all know, consumer confidence is down and actually reached an all-time low of 64.5 in March (the lowest in five years!). Consumers also have reasons to worry due to high commodity prices with oil reaching a record high of $110 per barrel as well as rising food costs. One of the other reasons that there is so much volatility is because mortgage interest rates are directly attributed to banks needing to sell loan holdings, investors growing weary of any investment dealing with mortgages as well as rising inflation fears.

So, How Can We Protect Ourselves?

Borrowers don’t really have any set way of protecting themselves against changing market rates because no one knows (at least, not at this point) what direction the future of the economy is heading in. The only thing that people are somewhat sure of is what interest rate makes sense in terms of getting a loan. To help offer some semblance of stability, borrowers can look into mortgage backed security (MBS) in which investors know ahead of time the type of return that they are going to receive, just like a certificate of deposit. This requires that the investor makes sure that the borrower is capable(has a job), willing to repay the debt(credit report), has the cash to close (verification of deposit), and the value is in the property (appraisal), thereby helping to assure the buyer that the bond will perform as expected.

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Tags: real estate //