What’s driving current mortgage rates?
Mortgage rates today are up slightly, taking their cue from these monthly reports: Consumer Spending (predicted .3 percent increase, actual was a HUGE .6 percent increase), Personal Income (predicted: .3 percent increase, actual, .3 percent increase), and Core Inflation (Predicted .1 percent increase, actual .2 percent increase).
Two of those three numbers point to increasing inflation and interest rates.Rates Below Are Averages. Get Your Personalized Rates Here. (Dec 13th, 2018)
|Conventional 30 yr Fixed||4.622||4.633||Unchanged|
|Conventional 15 yr Fixed||4.208||4.227||Unchanged|
|Conventional 5 yr ARM||4.188||4.72||+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||3.875||5.087||+0.02%|
|30 year fixed VA||4.542||4.736||+0.04%|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||4.188||4.401||Unchanged|
Today’s data indicate increasing interest rates.
- Major stock indexes opened mixed and flat (neutral for mortgage rates)
- Gold prices fell $2 to $1,301 an ounce. (That is slightly bad news 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 fell $1 to $67 a barrel (that’s good for rates because energy prices play a large role in creating inflation. This drop continues a trend started late last week and is very good news for mortgage rates)
- The yield on ten-year Treasuries fell 2 basis points (2/100th of 1 percent) to 2.84 percent. That is good for mortgage rates because mortgage rates tend to follow Treasuries.
- CNNMoney’s Fear & Greed Index was nearly unchanged, rising by 1 point to 42 (out of a possible 100). That means we’re in the “neutral” range. Moving into a less fearful state is usually bad 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 brings a lot of significant economic reporting, with the most important days being Thursday and Friday. Here’s is the report schedule:
- Monday: nothing (Memorial Day)
- Tuesday: Case-Shiller home price index (previous month 6.5 percent increase), Consumer confidence index for May (predicted .9 point increase from 126.5 to 127.5)
- Wednesday: ADA Employment for May (previous 204,000), Fed’s Beige Book
- Thursday: Weekly Jobless Claims (predicted 225k), Consumer Spending (predicted .3 percent increase), Personal Income (predicted: .4 percent increase), and Core Inflation (Predicted .1 percent increase)
- Friday: Monthly Employment Rate (Unemployment rate expected to remain at 3.9 percent), Monthly Non-farm Payrolls (predicted: 198,000 new jobs), Average Hourly Earnings (predicted up .2 percent).
Rate lock recommendation
Rates are trending higher despite some occasional dips. Overall, it’s better to take a defensive position when locking rather than floating and hoping — unless you are trying to refinance and have a target rate you need to hit to make it worthwhile. Today’s lower rates are a gift. I would lock if I had a mortgage in process.
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 (Dec 13th, 2018)