What’s driving current mortgage rates?
We got the first interest-rate-related economic report of the week today, and here is what came of it:
The Consumer Price Index (CPI) spiked to .5 percent in January, 20 percent higher than the .4 percent predicted by analysts. Higher energy prices were the biggest factor in the increase.
However, the more-important Core reading (stripping out volatile gas and food prices) rose just 0.3 percent last month. The 12-month rate of core inflation remained at 1.8 percent.Verify your new rate (Nov 15th, 2018)
Mortgage rates today
Today’s mortgage rates opened mostly unchanged except for government-backed home loans with shorter fixed terms.
|Conventional 30 yr Fixed||4.58||4.591||Unchanged|
|Conventional 15 yr Fixed||4.083||4.102||Unchanged|
|Conventional 5 yr ARM||3.938||4.303||Unchanged|
|30 year fixed FHA||4.417||5.423||Unchanged|
|15 year fixed FHA||3.688||4.638||+0.06%|
|5 year ARM FHA||3.875||4.867||+0.02%|
|30 year fixed VA||4.455||4.648||Unchanged|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||4.25||4.191||+0.05%|
Financial data that affect today’s mortgage rates
Today’s early data are favorable for mortgage rates.
- Major stock indexes opened lower across the board (good for rates, because rising stocks typically take interest rates with them — making it more expensive to borrow )
- Gold prices rose $4 an ounce (up for the third consecutive day) to $1,331, reversing last week’s downward trend. (That is good 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 barrel for the second straight day to $58 (good for mortgage rates, because higher energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries rose three basis points (3/100th of one percent) to 2.87 percent. That’s bad for mortgage rates because they tend to follow Treasuries
- CNNMoney’s Fear & Greed Index edged up 1 point to a reading of 13 (out of a possible 100). That’s considered the “extreme fear” range. That’s bad for future rates because it moved in a less-fearful direction, but investors are still very spooked. “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.
This week will bring a few reports of interest to anyone floating a mortgage rate. Here are the most pertinent:
- Wednesday: The Consumer Price Index (CPI), a highly-important indicator of inflation, and January’s Retail Sales report, which tracks spending activity at the consumer level. If they exceed predicted levels, mortgage rates could rise. If actual figures are lower than predicted, rates could fall.
- Thursday: Weekly Unemployment Claims, National Association of Home Builders (NAHB) Index
- Friday: Consumer Sentiment (very important) and Housing Starts
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 (Nov 15th, 2018)