Curve

Mortgage rates spiked, but don’t cancel your loan search. Here’s why

Peter Warden
The Mortgage Reports editor

Freddie Mac reports an uptick in mortgage rates

Keeping an eye on mortgage rates? If so, you’re probably flooded with news about Freddie Mac’s weekly survey.

That’s no surprise. According to Freddie Mac, 30-year mortgage rates spiked 0.17%, the biggest one-week jump since October 2018.

Home buyers waiting to lock in their rate and apply for a loan might be feeling down — but don’t lose heart.

In fact, taken in context, mortgage rates this week are still far below average. Rates just a tick above or below 4% should still be considered a win.

Lock in today's low rates. Start here. (Oct 18th, 2019)

The impact of higher mortgage rates

Of course, higher rates matter. When you’re borrowing huge amounts over long periods, even small changes to your rate can make a big difference to the total amount you pay over the lifetime of your mortgage.

Let’s look at an example.

Suppose you’re the best sort of borrower, with a chunky down payment, a great credit score and few existing debts. According to Mortgage News Daily, you might have been offered a rate of 3.82% for a 30-year, fixed-rate mortgage (FRM) on Tuesday, September 17.

The Mortgage Reports mortgage calculator allows us to see monthly payments on this loan:

  • Mortgage amount (30-year FRM): $200,000
  • Monthly payment at 3.82%: $934*
  • 360 monthly payments: $336,240

Now let’s see how that same scenario looks at the lowest recent rate, which was 3.46% on Sept. 4:

  • Mortgage amount (30-year FRM): $200,000
  • Monthly payment at 3.46%: $894*
  • 360 monthly payments: $321,840

All told, that 0.36% rate reduction saves you about $15,000 over the life of the loan.

*Payments shown include principal and interest only. Property taxes, homeowners insurance, and other associated costs are excluded.

What the figures mean

Of course, nobody likes to pay $40 a month more than they’d hoped. And $15,000 extra sounds huge. But over the course of 30 years, those numbers are spread out enough that they’re unlikely to cause real pain to most homebuyers.

Typically, a couple years of higher wages will easily wipe out the monthly issue. And how much will $15,000 be worth in 2049? Chances are, the sticker shock will wear off over time.

Don’t get mad, get context

Rates might look bad, but things were a lot worse during the first week of this year.

Freddie Mac’s weekly survey for January 3, 2019, showed average rates for a 30-year fixed rates mortgage at about 4.5%.

Compared to today’s rates, buyers in January would have paid about $80 more per month for the same loan described above. That’s $29,000 more over the life of the loan.

Mortgage rates are up this week, but they’re still among the lowest overall rates since Freddie Mac began tracking mortgage data in 1971.

To put things in even sharper perspective: Freddie Mac has been tracking mortgage rates since 1971, and in all that time, rates for a 30-year FRM never dropped below 6% until 2002.

At 6%, the loan described above would have cost nearly $1,200 per month — or an extra $95,000 over 30 years.

Some history from the archive of Freddie Mac’s weekly survey

Just for fun, let’s go back to Freddie’s highest recorded rate for a 30-year FRM. What do you think? Eight percent? Ten percent? Or maybe even 12%?

Nope. Freddie Mac’s 30-year FRM record was 17.82% in November 1981.

It may be unwise to complain to homeowners from that era about a sub-4% loan. (And if you’re still paying far-above-average rates, now might be the time to refinance.)

See today's mortgage and refinance rates. Start here. (Oct 18th, 2019)

The Fed meeting and mortgage rates

Freddie Mac’s weekly survey was just one piece of mortgage news this week. Many buyers also kept an eye on Wednesday’s Fed meeting, where bank rates were lowered by 0.25%.

To be clear, the Federal Reserve does not directly determine mortgage rates.

If you want to be technical, it often does determine rate changes for existing, adjustable-rate mortgages. But they’re relatively few.

So what was all that fuss about the Fed committee’s statement on September 18th? What does a lower federal funds rate mean for home buyers and refinancers looking for low mortgage rates?

What the Fed decided

The Federal Reserve committee that determines its own rates is called the Federal Open Market Committee (FOMC). Yesterday, the FOMC decided to cut its main rate by a quarter-point. So it’s now in a range of 1.75% to 2%.

Although the committee formally determines only the federal funds rate, many consumer financial products are directly or indirectly tied to that.

So, if you have a loan out with a variable rate — such as credit cards, most auto loans, home equity lines of credit (HELOCs) and personal loans — you may well see your monthly payments fall just a little.

Fewer future cuts

You might think markets related to borrowing would fall on the Fed’s rate cut. But yields on 10-year US Treasury bonds (to which mortgage rates are closely related) actually rose on the news.

The reason? It wasn’t the Fed cut itself, because that was almost universally expected.

Rather, it was the statement that accompanied the Fed’s reduction that had an impact on mortgage rates. It revealed that no member of the committee could foresee the federal funds rate dipping below a 1.5% to 1.75% range between now and the end of 2022, according to The New York Times.

What that means for mortgage rates

Of course, this disappointed markets and enraged President Donald Trump, who tweeted, “[Fed chair] Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision!” Last week, he was demanding that the Fed get rates down to zero or even lower. But Chair Powell later clarified that the Fed would cut rates further only if the economy needed it.

Chances are, markets will get used to the idea that further rate cuts are being held back unless and until they’re required to combat a looming recession. But you can expect volatility over the next few days as investors and analysts adjust their thinking and expectations.

Lock now or wait for rates to fall back down?

The question on many borrowers’ minds will be whether to wait and see if rates move back into the 3’s, or lock now to protect against a continued upward trend.

The important thing to remember is that mortgage rates are still among the lowest since Freddie Mac started recording them in 1971.

If you’re seeing favorable rates despite this week’s rise, don’t hesitate to lock them in. If today’s not your day, maybe them float a bit longer.

Verify your new rate (Oct 18th, 2019)