July 1, 2016 09:23 AM Eastern
Mortgage Rate Lock Recommendation
June 30 2016
Lock if closing in 7 days:Rates may be heading up
Once again, there looks to be a good chance of mortgage rates holding steady or maybe rising a little today. However, the early trends on which that prediction is based frequently change course, so there are no guarantees. Indeed, as recently as yesterday and the day before, rates inched down, contrary to the expectations created by those trends. Still, if we were buying a home in June or July, we'd lock now, while rates are at three-year lows and close to all-time lows, rather than gamble on further falls. But, if you're braver than we are, you could legitimately take a chance and continue to float. Read on for more.
As the shock of Brexit (British exit from the European Union) recedes, domestic economic data regain their influence on markets and mortgage rates. And, this morning, weekly jobless numbers were released. During the week ending June 25, there were 268,000 new claims for unemployment insurance. The number had been an unexpectedly low 259,000 over the previous seven days, and the consensus forecast among analysts for today's figure had been 266,000, according to Econoday. Hmm. Given that weekly figures are inevitably volatile, and that 268,000 is very close to 266,000, maybe we're back to reading the entrails of the Brexit vote for clues about today's movements in mortgage rates.
And, for those, we have mainly to rely on yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates. At about 10:00am ET, those were higher, though not sharply so. While those yield trends on those bonds at that time of the morning frequently turn out to be accurate predictors of the direction of travel for the day's mortgage rates, they slow, accelerate or reverse sufficiently often that they can't be relied upon as a basis for making important financial decisions. And, as we've seen recently, the relationship between those and mortgage rates can sometimes become slightly elastic.
Major foreign stock-market indexes were mostly higher across Asia and Europe earlier, though all changes were moderate. Twenty-five minutes after opening, the Dow Jones industrial average was up by +0.12 percent. At 9:48am (ET), crude oil prices stood at $48.69/barrel, compared with the $48.30/barrel seen at roughly the same time yesterday.
Recent Mortgage Rates
Average rates for 30-year fixed-rate mortgages (FRMs) fell yet again yesterday, dropping by a single basis point (1/100th of 1 percent – see below for a longer explanation), according to Mortgage News Daily. Add that to the 16-basis-point tumble seen over Friday through Tuesday, and the average is at a 37-month low and remains within a stone's throw of its all-time low. Yesterday's fall (the smallest possible) was a surprise to some, because it went against the yield trend for those 10-year Treasury bonds, which rose quite sharply later in the day. But such phenomena aren't rare during times of volatility.
The average rate nationwide for a 30-year FRM during the week ending June 30 was 3.48 percent with an average 0.5 point, according to Freddie Mac's latest weekly survey, published this morning. It was 3.56 percent during the week ending June 23, and 3.54 percent seven days before that. This time last year, the average 30-year FRM came in at 4.08 percent.
Freddie Mac chief economist Sean Becketti remarked in a statement accompanying the latest data:
In the wake of the Brexit vote, the yield on the 10-year U.S. Treasury bond plummeted 24 basis points. The 30-year mortgage rate declined as well, but not by as much, falling 8 basis points to 3.48 percent. This week's survey rate is the lowest since May 2013 and only 17 basis points above the all-time low recorded in November 2012. This extremely low mortgage rate should support solid home sales and refinancing volume this summer.
There remains a risk in choosing to float or lock your rate. True, there are opportunities for rewards should rates fall further, but there is also a continuing danger of being trapped in an upward cycle that doesn't end before you have to lock
So those who are cautious may wish to lock today, trading the possibility of further falls in rates for the security of fixing what should still be an exceptionally good mortgage deal by both recent and historical standards. Those who like to gamble might prefer to wait awhile before locking, hoping there will be further falls ahead. Only you can decide on the risk with which you personally are comfortable.
Why Mortgage Rates Move
Unlike most other interest rates, those for mortgages (except ones for existing adjustable-rate mortgages) are largely determined by the supply of money into the market from investors and the demand for such loans from consumers. That supply is heavily affected by the amount of risk investors are prepared to sustain in their portfolios. When spooked by economic uncertainty, they tend to buy safer assets, including mortgage securities, which can result in an increased supply of product (cash) that drives down the price (rates). When they're more confident, they tend to invest in riskier but more profitable assets, which reduces the supply of money for home loans and pushes up rates. A second influence is perceptions of how inflation rates are likely to move over the long term, but that tends to be a less important factor in daily and short-term movements. None of this is to suggest the Federal Reserve doesn't affect mortgage rates; merely that it does so only indirectly.
The relationship between 10-year Treasury bonds and mortgage rates is more complicated. Investors generally view those bonds and mortgage securities as similarly secure havens for their money when they're spooked – with bonds the safer of the two. That means they tend to buy or sell both at the same time, depending on their level of confidence in the U.S. and global economies. So many lenders refer to those particular Treasury yields when setting their rates. Usually, the relationship between 10-year Treasury yields and mortgage rates is surprisingly close, though rates tend to be less volatile, and sometimes the two drift apart a little.
Some Questions Answered
Why, counterintuitively, do bond yields fall when prices for Treasuries rise? It's because you're buying a fixed return on your investment, and the more you pay for the right to that same fixed amount of money, the lower the yield you're going to get. That's a mathematical inevitability.
Why go on about "analysts' consensus forecasts" when reporting economic data? Well, they're often relevant. That's because investors frequently trade ahead of actual data based on those forecasts. So sometimes the difference between what's reported and what was expected can be as important as that between the new number and the one for the previous reporting period.
What is a basis point? Yes, it's 1/100th of 1 percent, but, when it comes to percentage points and basis points, these numbers are often mind-numbingly confusing. To give a purely theoretical example, suppose the best mortgage rate you could have gotten yesterday was 6.00 percent (let's hope it wasn't!), and that rate subsequently dropped by a single basis point. Your new rate would be 5.99 percent.
The Longer Term
In its latest (June) Housing Forecast, Fannie Mae predicts the rate for 30-year FRMs will average 3.6 percent this quarter and next, and rise to 3.7 percent through the following six months. It expects that to inch up to a 3.8 percent average for the last three quarters of 2017.
Freddie Mac's economists are less optimistic. In their latest Outlook report, published earlier this week, they wrote:
Despite rates stalling over the past two months, we still believe they will move up in June, allowing for the 30-year fixed to reach 3.7 percent in the second quarter and averaging 3.9 percent in 2016 and 4.5 percent in 2017. For short-term rates, we are still assuming a rate hike in the third quarter.
The Mortgage Bankers Association is even more pessimistic. In its June Mortgage Finance Forecast, published prior to the Brexit referendum, it reckoned that same average rate will creep up each quarter for the foreseeable future, reaching 4.0 percent in the last three months of this year, and hitting 4.8 percent by the last quarter of 2017.
You may prefer to see all these numbers as a sign of how difficult it is to forecast rates in this challenging economic environment, rather than as reliable guides to the futures.
"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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