What’s driving current mortgage rates?
Mortgage rates today improved nicely after the Labor Department released its Monthly Employment Situation Report.
Analysts predicted that the unemployment rate would remain at 3.8 percent, and average hourly earnings were predicted to increase by .3 percent. Instead, the unemployment rate increased to 4 percent (a significant difference) and pay increases only averaged at .2 percent increase,
Not good for the economy, but events that set back the economy often improve mortgage interest rates.Rates Below Are Averages. Get Your Personalized Rates Here. (Sep 25th, 2018)
|Conventional 30 yr Fixed||4.708||4.72||-0.04%|
|Conventional 15 yr Fixed||4.25||4.269||-0.04%|
|Conventional 5 yr ARM||4.188||4.714||Unchanged|
|30 year fixed FHA||4.417||5.423||-0.04%|
|15 year fixed FHA||3.625||4.575||-0.06%|
|5 year ARM FHA||3.875||5.141||Unchanged|
|30 year fixed VA||4.583||4.778||+0.04%|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||4.25||4.481||Unchanged|
Financial data affecting today’s mortgage rates
Most indicators are neutral-to-good for interest rates. I’d probably lock.
- Major stock indexes opened lower (good for mortgage rates)
- Gold prices are nearly unchanged at $1,258 an ounce. (That is neutral 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 are still at $74 a barrel (that’s neutral for mortgage rates today, but when we blow through the $70 threshold, it’s not great long-term because energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries fell 1 basis point (1/100th of 1 percent) to 2.82 percent. That is positive for mortgage rates because mortgage rates tend to follow Treasuries and it’s happened three days straight
- CNNMoney’s Fear & Greed Index rose 5 points to 36 (out of a possible 100). That is a less fearful direction, but we are still in the “fear” range. Normally, “fearful” investors 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 offers a few pertinent economic releases. Most of the releases we get won’t be of major importance until Friday. Keep your eyes open.
- Monday: ISM Manufacturing Index (previous 54.6)
- Tuesday: Factory Orders for May are pegged by analysts to stay the same. That’s about as neutral as it gets.
- Wednesday: Independence Day (no reports scheduled)
- Thursday: Weekly Jobless Claims, not that important because it’s weekly, ADP Employment (Previous 178,000), which many believe foreshadow the highly-important Monthly Employment Situation, due Friday. If payrolls rise, interest rates could as well. We also get a speech from the Fed, which can cause all sorts of chaos or nothing at all.
- Friday: The most important day of the month. The Employment Situation Report predictions show the unemployment rate should remain at 3.8 percent, and payroll numbers are expected to stay the same as the previous months. You can see why rates are not really moving these days. Nothing’s changing.
Rate lock recommendation
Rates are trending higher over the long-term, with occasional dips. Today’s economic indicators are mostly favorable, so if your rate has not increased or even dropped this morning, grab it.
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. I recommend:
- 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 (Sep 25th, 2018)