What’s driving current mortgage rates?
Rates today fell slightly below yesterday’s opening. March’s Consumer Price Index (which increased .2 percent the previous month) dropped .1 percent. That’s as expected, so not the biggest driving force for today’s mortgage rates.
Later, the Federal Open Market Committee (FOMC) concludes its monthly meeting, and investors will check the minutes from the Fed meeting this afternoon for clues about the extent and timing of future rate changes.
UPDATE: The Fed announced another .25 percent rate increase this afternoon. Oil prices also spiked, which is probably more concerning to those floating an interest rate than the non-that-surprising Fed move.Rates Below Are Averages. Get Your Personalized Rates Here. (Dec 12th, 2018)
|Conventional 30 yr Fixed||4.58||4.591||Unchanged|
|Conventional 15 yr Fixed||4.083||4.102||Unchanged|
|Conventional 5 yr ARM||4.063||4.606||-0.02%|
|30 year fixed FHA||4.417||5.423||+0.04%|
|15 year fixed FHA||3.625||4.575||Unchanged|
|5 year ARM FHA||3.938||5.021||Unchanged|
|30 year fixed VA||4.413||4.606||-0.04%|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||4.125||4.281||Unchanged|
Financial data affecting today’s mortgage rates
Stocks (and rates) began today, and the data below point mostly to flat or lower mortgage rates. However, oil prices rose this afternoon and I would not be surprised to see reprices for worse.
- Major stock indexes opened lower (good for mortgage rates)
- Gold prices rocketed $12 to $1,355 an ounce. (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 prices rose $1 to $66 a barrel (bad for mortgage rates, because higher energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries lowered four basis points (4/100th of one percent) to 2.76 percent. This is very good for mortgage rates because they tend to follow Treasuries
- CNNMoney’s Fear & Greed Index increased by a point to a reading of 17 (out of a possible 100). That’s up, which would be bad for rates, but we’re still in the “extreme fear” range, which is good for bonds and rates. Moving into a more fearful state is usually good for rates. “Fearful” investors generally push bond prices up (and interest rates down) as they leave the stock market and move into bonds, while “greedy” investors do the opposite.
This week’s reporting is pretty low-level until we get to Friday. We will update with analysts’ predictions as they come in.
- Monday: Nothing
- Tuesday: Producer Price Index (PPI) for March (previous reading was a .2 percent increase)
- Wednesday: March’s Consumer Price Index (increased .2 percent the previous month) and the minutes from the Fed
- Thursday: Weekly Jobless Claims (previous week was 242,000)
- Friday: Preliminary Consumer Sentiment Index for April (previous reading was 101.4)
Rate lock recommendation
Tomorrow’s release is not that important. If you need a certain rate to qualify for a loan and can get it, locking is a good idea. If you can get a better deal (say, a .125 percent lower rate for locking 15 days instead of 30), and you’re just a couple of days from being able to do the shorter lock, I recommend doing it. But that’s for people with my risk tolerance.
In general, pricing for a 30-day lock is the standard most lenders will (should) quote you. The 15-day option should get you a discount, and locks over 30 days usually cost more. If you can get a better rate (say, a .125 percent lower rate) by waiting a couple of days to get a 15-day lock instead of a 30, it’s probably safe to consider.
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. However, the longer you lock, the higher your upfront costs. If you are weeks away from closing on your mortgage, that’s something to consider. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.
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
- LOCK 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.
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 12th, 2018)