What’s driving current mortgage rates?
Mortgage rates today backed off slightly after three consecutive increases. New Home Sales for June, predicted to drop from 689k to 663k, came in much lower at 631,000. And the Commerce Department revised the previous month’s numbers way down — from 689k to 666k.
And median prices of newly-built houses dropped 4.2 percent. That means the housing industry has not performed as well as expected, and that could signal to weakening in the broader economy. Which is good for mortgage interest rates.Rates Below Are Averages. Get Your Personalized Rates Here. (Sep 22nd, 2020)
|Conventional 30 yr Fixed||4.75||4.761||-0.04%|
|Conventional 15 yr Fixed||4.372||4.391||+0.04%|
|Conventional 5 yr ARM||4.25||4.737||Unchanged|
|30 year fixed FHA||4.417||5.423||-0.04%|
|15 year fixed FHA||3.688||4.638||Unchanged|
|5 year ARM FHA||3.938||5.166||Unchanged|
|30 year fixed VA||4.417||4.609||-0.17%|
|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 are bad for mortgage rates, and you can see the result in the rate table.
- Major stock indexes opened mixed but flat (neutral for mortgage rates)
- Gold prices remained at $1,229 an ounce. (That is neutral for 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 remained at $69 a barrel (that’s bad for mortgage rates today because energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries fell by 3 basis points (1/100th of 1 percent) to 2.93 percent. That is bad for mortgage borrowers because mortgage rates tend to follow Treasuries
- CNNMoney’s Fear & Greed Index fell 5 points to a reading of 63 (out of a possible 100). That is good for rates, moving firmly into the “greedy” level. 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
Rate lock recommendation
While mortgage rates are rising long-term, we got a break today. If I were floating an interest rate, I’d strongly consider locking in today.
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
- LOCK if closing in 45 days
- LOCK if closing in 60 days
This week offers a few pertinent economic releases. Rates are unlikely to move much unless something political explodes (figuratively, of course). Friday is by far the most important day.
- Monday: Existing Home Sales for June from The National Association of Realtors is less important but does indicate demand for mortgages. Experts predict a drop to 5.38 million, good for rates
- Tuesday: Nothing
- Wednesday: New Home Sales for June predicted to drop from 689k to 663k
- Thursday: Weekly Jobless Claims (experts predict 219,000). Not very important but more unemployment is better for rates, less is worse
- Friday: The most important, with Consumer Sentiment expected to increase from 97.1 to 97.3. A bigger increase would hurt rates, a smaller one would help.
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 22nd, 2020)