What’s driving current mortgage rates?
Mortgage rates today opened unchanged except for government-backed 30-year fixed loans. Government loans are slightly more profitable for lenders, so they can often absorb price increases to a point. But eventually, they have to move higher and join the rest of the pack. There are no pertinent economic releases today, but the financial data below point to higher rates.Rates Below Are Averages. Get Your Personalized Rates Here. (Nov 19th, 2018)
|Conventional 30 yr Fixed||4.75||4.761||Unchanged|
|Conventional 15 yr Fixed||4.292||4.311||Unchanged|
|Conventional 5 yr ARM||4.25||4.743||Unchanged|
|30 year fixed FHA||4.542||5.55||+0.08%|
|15 year fixed FHA||3.75||4.701||Unchanged|
|5 year ARM FHA||3.875||5.087||Unchanged|
|30 year fixed VA||4.667||4.863||+0.09%|
|15 year fixed VA||3.875||4.189||Unchanged|
|5 year ARM VA||4.0||4.331||Unchanged|
Financial data affecting today’s mortgage rates
The main indicator that concerns me about future rates is oil price increases. Prices were below $50 a barrel about six months ago; now they’re hitting $70. That should concern anyone who doesn’t own an oil company.
- Major stock indexes opened slightly higher this morning (slightly bad for mortgage rates)
- Gold prices fell $6 to $1,408 an ounce. (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 prices reversed their trend and fell $2 to $68 a barrel (good news for mortgage rates, because higher energy prices play a large role in creating inflation. Prices were under $50 a barrel just 6 months ago)
- The yield on ten-year Treasuries rose for the second consecutive day by 3 basis points (3/100ths of 1 percent) to 2.98 percent. This bad, as mortgage rates tend to move with Treasury yields.
- CNNMoney’s Fear & Greed Index edged 3 points lower to 41 (out of a possible 100). That means we’re still in the “neutral” range. 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.
Releases this week are considerably less important than last week’s. We don’t get anything special until Wednesday.
- Monday: nothing
- Tuesday: nothing
- Wednesday: Producer Price Index (PPI) for April, which tracks inflationary pressure at the manufacturing / wholesale level of the economy. Analysts expect a .3 percent increase
- Thursday: Week unemployment claims (215,000 new claims expected), Consumer Price Index, which measures inflation at the consumer level (analysts predict a .3 percent increase). The Core CPI is expected to edge up by .2 percent
- Friday: Consumer Sentiment for May (economists anticipate a 1 point decrease to 98.7)
Rate lock recommendation
Rates are rising overall, though we are holding steady this morning. I would lock if I were closing any time soon. If my closing date was further out than 30 days, and I could lock without an upfront charge, I’d consider doing that as well.
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
- 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)