What’s driving current mortgage rates?
Mortgage rates today will get no guidance from scheduled economic reporting, as there isn’t any. However, we did receive a report on the Fed’s “Beige Book” late yesterday. (It’s so-called because of its bold color.) In it, the Fed pointed to increasing wage pressures, and analysts expect that we’ll see short-term rate increases every three months.Rates Below Are Averages. Get Your Personalized Rates Here. (Dec 10th, 2018)
|Conventional 30 yr Fixed||4.708||4.72||Unchanged|
|Conventional 15 yr Fixed||4.25||4.269||Unchanged|
|Conventional 5 yr ARM||4.25||4.737||Unchanged|
|30 year fixed FHA||4.375||5.381||-0.04%|
|15 year fixed FHA||3.625||4.575||Unchanged|
|5 year ARM FHA||3.938||5.166||Unchanged|
|30 year fixed VA||4.542||4.736||Unchanged|
|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
The most important indicators mostly offset each other. Combined with the lack of important economic reporting, you can see why mortgage interest rates didn’t move much this morning.
- Major stock indexes opened lower (good for mortgage rates)
- Gold prices rose $12 to $1,228 an ounce. (That is good for rates because gold has dropped for several straight days. 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 partially reversed yesterday’s $3 a barrel increase, falling back $2 to $68 a barrel (that’s good for mortgage rates today because energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries increased by three basis points (3/100th of 1 percent) to 2.89 percent. That is bad for mortgage borrowers because mortgage rates tend to follow Treasuries
- CNNMoney’s Fear & Greed Index remained almost unmoved, increasing 1 point to a reading of 53 (out of a possible 100). That is slightly bad for rates, moving into a sightlier “greedy” state. Normally, “greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite
This week offers a few pertinent economic releases. Rates are unlikely to move much unless something political explodes (figuratively, of course).
- Monday: Retail Sales report for June is not one of the more important reports, but does indicate consumer activity. More is bad for mortgage rates, less is good.
- Tuesday: July Home builder’s Index (previous month was 68, higher numbers mean more building activity and rates), Industrial Production for June (forecast is .6 percent increase)
- Wednesday: Housing Starts for June (predicted 1.03 million).
- Thursday: Weekly Jobless Claims (experts predict 224,000), we also get the Leading Economic Indicators (last months increased by .2 percent. More is worse for rates, less is better.) The Fed also releases its Beige Book, which may provide insight into the timing and amount of future rate changes.
- Friday: Nothing
Rate lock recommendation
Mortgage lenders tend to price more conservatively (higher) on Friday’s just in case an economic event over the weekend affects interest rates. So it’s not usually the best day of the week to lock. I’d probably float and take my chances if waiting would get me a better deal (15-day lock instead of 30, for instance).
In general, pricing for a 30-day lock is the standard most lenders will (should) quote you. The 15-day or 7-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. 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 (Dec 10th, 2018)