What’s driving current mortgage rates?
Interestingly, after we published this column yesterday, stock markets plunged into chaos with the Dow falling as much as 1,500 points before recovering down about 1,100. That’s normally a good thing for mortgage rates, and you might have benefited from late-day repricing. And major markets are down again this morning — perhaps time to sit on your loan and not lock if you’re floating.
We have no economic reporting, which leaves mortgage borrowers twisting in the wind and subject to every rumor and random White House tweet that has power over marketsVerify your new rate (Dec 13th, 2018)
Mortgage rates today
|Conventional 30 yr Fixed||4.5||4.511||+0.08%|
|Conventional 15 yr Fixed||4.0||4.019||+0.08%|
|Conventional 5 yr ARM||3.938||4.303||Unchanged|
|30 year fixed FHA||4.288||5.293||+0.17%|
|15 year fixed FHA||3.563||4.512||-0.25%|
|5 year ARM FHA||3.813||4.843||-0.05%|
|30 year fixed VA||4.372||4.564||+0.17%|
|15 year fixed VA||3.75||4.063||-0.15%|
|5 year ARM VA||4.063||4.122||-0.07%|
Financial data that affect today’s mortgage rates
Today’s early data mostly point to increasing mortgage rates.
- Major stock indexes opened lower, following a huge drop yesterday (good for rates, because rising stocks typically take interest rates with them — making it more expensive to borrow )
- Gold prices fell $6 an ounce to $1,336, reversing yesterday’s increase. (That is 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 fell $1 to $64 barrel (good for mortgage rates, because higher energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries dropped a lovely 11 basis points (11/100th of 1 percent) to 2.74 percent. That’s a significant improvement in mortgage rates because mortgage rates tend to follow Treasuries
- CNNMoney’s Fear & Greed Index continued to drop like a rock, plunging from yesterday’s “fearful” 40 (18 points down from Friday’s) to a scary 17 — “extreme fear.” That’s good for future rates because 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, we can catch our breath; there are very few pertinent economic reports scheduled. In fact, other than a few Treasury auctions and Thursday’s weekly unemployment report, we’ll be relying almost entirely on economic data (like the list above), global financial and political news, and those 3:00 am tweets from the White House.
Tomorrow, we will get a 10-year Treasury Note auction. This should provide clues about future demand for mortgage-related securities. If the auction gets strong demand from investors, we bond and mortgage-backed securities (MBS) prices should increase, pulling mortgage rates lower.
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. In a rising rate environment, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. This week is so volatile, however, you might snag a better deal if you jump in when stocks are down and lenders improve pricing. Just understand that these things move very quickly when participants are nervous — and they are.
If you’re still floating, stay in close contact with your lender, and keep an eye on markets.
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- FLOAT if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT 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. This illustration from Mortgage News Daily shows how rising stocks tend to pull interest rates with them.
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 (Dec 13th, 2018)