Mortgage rates today, October 20, plus lock recommendations

What's driving current mortgage rates?

Mortgage rates today gave back the gains they made yesterday. September's Existing Home Sales report from the National Association of Realtors delivered unexpectedly good news for the industry, which is not necessarily good for interest rates.

Nearly 5.4 million houses changed hands last month, while analysts had expected 5.3 million. Demand for homes means demand for mortgages, which can push prices up.

In addition the this report, today's data (below) also influence what you'll pay for a loan this morning.

Mortgage rates today

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Today's data

Today's indicators mostly point to rising rates. I'd probably hold off locking until Monday, as Friday rates tend to be a little overstated anyway.

• Major stock indexes are up (good for rates)
• Gold prices fell $3 an ounce to $1,285  (bad for rates, because gold prices normally fall when the economy improves, and rise when it gets shaky -- and poorer economic conditions usually cause interest rates to move lower)
• Oil rose $1 to $52 a barrel (bad for rates -- rising energy prices calm fears of inflation, which decreases interest rates)
• The yield on ten-year Treasuries rose a huge 8 basis points (8/100ths of 1 percent) to 2.38 percent (very bad for rates, because mortgage rates tend to follow Treasuries)
• CNNMoney’s Fear & Greed Index spiked from 77 to 92, the "Extreme Greed" level. This is very bad for rates, because "Extremely Greedy" investors tend to turn to stocks and from bonds and mortgage-backed securities. When everyone wants to sell their bonds, bond prices fall, which in turn causes rates to rise (see below)

Mortgage rates today are still very favorable for home buyers. The climate is highly-encouraging for real estate purchases.

Monday

Rate lock recommendation

There has been nothing that exciting in mortgage rates this week, but the market data indicate that rates could rise in the near-term. The lock decision mainly rides on your comfort with risk. Rates are good now if you want to "set it and forget it."

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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 not 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.

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