What’s driving current mortgage rates?
Mortgage rates today were not affected by the release of July’s Consumer Price Index, which measures inflation at the consumer level of the economy. It came in with a 2 percent increase, exactly as analysts predicted. This would already have been priced into the interest rate market, and unlikely to move it.
However, rates did drop significantly for many products. That is because yesterday afternoon’s Treasury auction of 30-year Notes received a healthy response from investors, pushing prices up and yields (rates) down.Rates Below Are Averages. Get Your Personalized Rates Here. (Dec 12th, 2018)
|Conventional 30 yr Fixed||4.75||4.761||Unchanged|
|Conventional 15 yr Fixed||4.333||4.353||-0.04%|
|Conventional 5 yr ARM||4.313||4.79||-0.02%|
|30 year fixed FHA||4.413||5.42||-0.09%|
|15 year fixed FHA||3.75||4.701||Unchanged|
|5 year ARM FHA||3.938||5.239||-0.1%|
|30 year fixed VA||4.542||4.736||Unchanged|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||4.25||4.558||Unchanged|
Financial data affecting today’s mortgage rates
Like yesterday’s, this morning’s data are mostly favorable for interest rates.
- Major stock indexes opened lower (good for mortgage rates)
- Gold prices remained at $1,222 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 stayed at $67 a barrel (neutral for mortgage rates today, because energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries fell 5 basis points (5/100ths of one percent) 2.89 percent. That is very good for mortgage borrowers because mortgage rates tend to follow Treasuries
- CNNMoney’s Fear & Greed Index dropped 10 points to a reading of 61 (out of a possible 100). That is great for interest rates because the index moved into a less “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
Rate lock recommendation
Today’s rates are have dropped into many consumers’ strike zones. If you’re buying a home, this is a good day to lock, but typically, rates are higher on Fridays than they are the following Monday. You may be able to squeeze a slightly lower rate by waiting.
For instance, if you could get a 15-day instead of a 30-day lock, you’d probably save about .125 percent in fees. If you’re refinancing, you probably have a rate in mind, and today may have delivered it.
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
- FLOAT if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
This week is light on economic reporting and expected to be fairly uneventful.
- Monday: Nothing
- Tuesday: Nothing
- Wednesday: Treasury auction of 10-year Notes (good demand = higher prices and lower rates, and the opposite is also true)
- Thursday: Weekly Jobless Claims (not very important but more unemployment is better for rates, less is worse) and Treasury auction of 30-year Notes (good demand = higher prices and lower rates, and the opposite is also true), Producer Price Index (PPI) (higher than the .3 percent expected increase could cause rates to rise)
- Friday: The most important, Consumer Price Index, measures inflation at the consumer level of the economy. Analysts predict a 0.2 percent increase. Lower numbers would be good for rates; higher would be bad because that would signal inflation.
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 12th, 2018)