What’s driving current mortgage rates?
Mortgage rates today dropped back from yesterday’s spiky highs. That shows that lenders may have over-reacted to the news from the European Central Bank and that they were pricing protectively ahead of the State of the Union address. It’s important for borrowers to understand that markets are fear-driven and that rates tend to rise very quickly when rumors fly but fall slowly when the news is favorable.
Interestingly, the one economic report we received today also seems to confirm inflationary concerns. ADP says it added 234,000 new payrolls to its system, well-exceeding forecasts of 185,000 (Reuters) and 193,000 (The Wall Street Journal). Investors often see the ADP report as a sneak preview of Friday’s Monthly Employment Situation Summary from the Labor Department.
We will also get a statement from the Fed this afternoon that could really move the needle if they indicate an imminent rate rise, or decide that the economy is not yet strong enough for that action.
So why are mortgage rates lower today? Matthew Graham, SEO of Mortgage News Daily, speculated that the State of the Union had nothing in it to alarm bond markets, and lenders exhaled this morning and lowered their pricing.Verify your new rate (Nov 19th, 2018)
Mortgage rates today
|Conventional 30 yr Fixed||4.375||4.386||Unchanged|
|Conventional 15 yr Fixed||3.958||3.977||Unchanged|
|Conventional 5 yr ARM||3.938||4.029||Unchanged|
|30 year fixed FHA||4.125||5.128||Unchanged|
|15 year fixed FHA||3.5||4.449||-0.06%|
|5 year ARM FHA||3.75||4.542||-0.02%|
|30 year fixed VA||4.167||4.357||-0.04%|
|15 year fixed VA||3.625||3.937||-0.06%|
|5 year ARM VA||4.063||3.83||Unchanged|
Financial data that affect today’s mortgage rates
Today’s early data mostly point to increasing mortgage rates.
- Major stock indexes opened higher (bad for rates, because rising stocks typically take interest rates with them — making it more expensive to borrow )
- Gold prices dropped $1 an ounce to $1,341. (That is slightly bad for mortgage rates. In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower)
- Oil remains at $64 barrel (neutral for mortgage rates, because higher energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries rose 3 more basis points (3/100th of one percent) to 2.74 percent, the highest it’s been in nearly three years. That’s worse for mortgage rates because mortgage rates tend to follow Treasuries
- CNNMoney’s Fear & Greed Index dropped 1 point to 62. That’s a positive development because that’s almost neutral when just a few days ago the index hit “extreme greed” territory. In this case, greed is NOT good. “Fearful” investors push rates down as they leave the stock market and move into bonds, while “greedy” investors do the opposite. That causes rates to rise
Mortgage rates today remain very favorable for anyone considering homeownership. Residential financing is still affordable.
This week delivers many important economic reporting and the potential for more movement in mortgage interest rates.
- Monday — personal income, core inflation, and consumer spending
- Tuesday — Case-Shiller Home Prices and Consumer Confidence
- Wednesday — ADP Employment and Fed announcement
- Thursday — Weekly unemployment, ISM Manufacturing Index
- Friday — Monthly employment report (most important report of the month)
If you’re not yet locked, pay careful attention next week. We’ll break down these individual reports and how they affect you next week.
Rate lock recommendation
In general, 30-day is the standard price most lenders will (should) quote you. The 15-day option should get you a discount, and locks over 30 days usually cost more. I agree with Mortgage News Daily, whose mortgage-backed securities (MBS) expert says,
“This isn’t an environment for floating and hoping that rates will bounce back. We’re on the scary ride until further notice. Lock early and plan on rates moving higher until we see a broad shift in momentum.”
Keep in mind that longer locks can cost at least .125 percent in FEES for 45 days or .25 percent in FEES (not the rate) for a 60-day lock.
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- LOCK if closing in 45 days
- LOCK if closing in 60 days
Video: More about mortgage rates
What causes rates to rise and fall?
Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying five percent interest ($50) each year. (This is called its “coupon rate.”) That’s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.
When rates fall
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is now five percent.
- Your interest rate: $50 annual interest / $1,000 = 5.0%
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.Verify your new rate (Nov 19th, 2018)