August 3, 2015 05:39 PM Eastern
Mortgage Rate Lock Recommendation
August 3 2015
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LendingTree is today changing its rate recommendations from lock to float. This is an even closer judgment call than usual, and those who are risk-averse may wish to go ahead and lock anyway.
There's not really a good empirical reason for making the change. However, you may share this writer's sense of a new hint of pessimism in markets, and that sort of sentiment tends to push rates down. Last Friday, for example, the employment cost index was published, something that is normally scarcely noticed, even by market nerds.
But the disappointing second-quarter data released then dragged down 10-year U.S. Treasury bond yields by a whopping 8 percentage points to close at 2.20 percent, compared with Thursday's 2.28 percent. And regular readers will know the importance of 10-year U.S. Treasury bonds to the mortgage market. These compete for the same investors' money and fulfill similar roles in investment portfolios, which is why their yields and rates shadow each other closely: when one goes up or down, the other almost always does the same. In other words, mortgage rates almost certainly took a tumble on Friday.
This blue mood may affect how other data are received in coming days -- not least by the Federal Open Markets Committee (FOMC), which is responsible for setting the Federal Reserve's rates. Any belief that the FOMC is likely to delay raising its rates could further depress bond yields and mortgage rates. In the meantime, good news may push up those rates less than normal, and bad pull them down more readily. Of course, a succession of better-than-expected data could transform sentiment, and see the opposite happening.
However, this morning's foreign news wasn't good. In China, two surveys on the manufacturing sector exposed weaknesses. And the Athens stock exchange plunged more than 22 percent when it opened for the first time in five weeks, though it recovered a little in later trading. Other European markets were largely unaffected. Scary data from foreign economies tend to create additional demand for U.S. Treasury bonds and mortgages (the so-called safe-haven effect), and that usually sees yields and rates fall a little.
Today is a heavy one for domestic economic data. New motor vehicle sales for July will emerge in coming hours as individual manufacturers release them. Other figures that have already been published this morning were mixed. June's personal incomes and outlays were expected to ease after an exceptional May, and did. The PMI manufacturing index was cool, but in line with analysts' consensus expectations, while the ISM manufacturing index was below the lower end of their forecasts. And construction spending was deeply disappointing, growing just 0.1 percent in June, way below even pessimistic predictions. Together, these may not seriously deepen the prevailing gloom, but they're very unlikely to lift it either.
The average rate for a 30-year fixed-rate mortgage during week ending July 30 was 3.98 percent with an average 0.6 point, according to Freddie Mac. The same rate averaged 4.04 percent during week ending July 23, and 4.09 percent seven days before that. Seeing that particular rate beginning with a "3" again, after six weeks when a "4" was in that spot, will surprise some.
Forecasting the direction of mortgage rates is difficult at the best of times. Something that might be expected in some circumstances to push both them and bond yields up can in others exert a downward force, as is happening this morning — and vice versa. Those forecasts are especially perilous when the future prospects of economies around the world (and at home!) are so hard to judge -- or, as now, when there's no appreciable pull in an upward or downward direction. However, absent more shock developments, few expect large changes in mortgage rates within the scope of these rate lock recommendations.
"Locking" your mortgage means that you and your lender have agreed on an interest rate and price for your home loan. Once your loan is locked, that's the rate and price you get, regardless of what happens in the financial markets. If rates go up, you're protected but if rates go down, you won't benefit either -- you close your loan at the rate you've locked and you can’t change it. Locks have expiration dates ranging from 30 to 60 days or more, and the longer your lock period, the more it costs. If you don't close your loan on time, you could end up paying a higher interest rate.
You can lock in your loan at any time during the process. Until you lock your interest rate, you are said to be "floating" your mortgage. The only rule is that you have to lock in before you can close on your purchase or refinance.
The decision to lock or float your loan can have a long term impact so it’s important you make the right choice. That’s why we offer a quick rundown of the key factors that drive mortgage rates today and everything you need to know.
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