June 29, 2015 11:26 PM Eastern
Mortgage Rate Lock Recommendation
June 29 2015
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LendingTree has again changed its rate lock recommendations and is now suggesting borrowers allow their rates to float. If you've read any headlines or seen a news report today, you'll already know why: it's all to do with the Greek (economic) tragedy playing out in Europe, which took a shocking turn over the weekend.
Last-ditch talks aimed at resolving the crisis broke down on Saturday, and there now seems effectively no hope that Greece will make its $1.77 billion debt payment to the International Monetary Fund when it falls due tomorrow. Default seems all but inevitable, and banks are closed in the country until next Monday to prevent a run. Many believe Greece is soon going to be forced out of the eurozone (the groups of countries that use the euro as their currency) and possibly the European Union (EU) itself.
If this were just a local issue, it would have little effect on American mortgage rates. But it may not be. Although Greece is a very small country, and the eurozone has taken steps to ring-fence any fall out from an exit, so-called contagion could yet fundamentally undermine the eurozone and impact foreign creditor banks. That could, in the view of some economists, set off a global financial crisis that would make the collapse of Lehman Brothers look like a picnic in the park. Both President Obama and Treasury Secretary Lew intervened over the weekend to offer help in reaching a resolution.
When facing such extreme threats, spooked investors usually turn to U.S. Treasury bonds as the safest haven for their money. That extra demand increases the "price" of those bonds by reducing their yields. And American mortgage rates are closely linked to the yields of 10-year U.S. Treasury bonds. When the latter go up or down, mortgage rates almost always follow, though not necessarily instantaneously. So, in theory, there's a good chance of bond yields tumbling, soon followed by mortgage rates. In practice, the fall may be less dramatic than that, or may even hardly happen at all. It's not as if Greece's problems have sneaked up on investors: they've been the stuff of headlines for months. And the prospect of the grim reality faced today has been trailed for weeks. So, many investors may already have taken defensive positions, while others might think the consequences of a Greek default could be less severe than is widely anticipated. Either of those might mean fewer are going to be taking panic measures over the coming days.
Still, some falls in bond yields and mortgage rates seem likely. On Friday, yields for 10-year Treasury bonds closed at 2.49 percent, the second-highest level in 2015, and just one basis point below the highest: 2.50 percent reached on June 10. That hardly suggests the widespread adoption of defensive positions. Perhaps on Friday some investors saw the looming risk and shrugged it off, assuming either Greece or its creditors would pull back from the brink. If so, they could be scrambling this morning. Certainly, markets in Europe, Asia, and Australasia reacted violently overnight to the news from Europe.
To give you some idea how Wall Street is responding, at about 9:30 a.m. ET this morning, that 10-year bond yield was down to 2.39 percent, according to CNBC's tracker. That's a long way down from Fridays' close (2.49 percent), but above last Wednesday's 2.38 percent. So it's hardly falling off a cliff. If the fall continues to be this gentle, it may be necessary to revisit the new mortgage rate lock recommendations very soon.
Just to prove it's not only Europe that's currently in trouble, McKinsey published its latest economic survey on Friday, which revealed, "Executives in emerging markets have grown less optimistic about the state of their home economies than they were in 2014." Meanwhile, closer to home, Puerto Rico Governor Alejandro García Padilla has said that his island cannot repay the $72 billion it now owes, and is currently in a "death spiral," according to The New York Times. Finally, those seeking more cheerful news should definitely avoid the annual report, out yesterday, of the Bank for International Settlements (the so-called central banks' central bank), which is a study in pessimism. It warns that central banks like the Fed have used all the tools in their boxes to attempt to fix the last financial crisis and have nothing left with which to address the next, assuming that comes along anytime soon.
No important domestic economic data are due to be published today, which is probably just as well. There's already enough excitement in the markets.
The average rate for a 30-year fixed-rate mortgage during week ending June 25 was 4.02 percent with an average 0.7 point, according to Freddie Mac. It was 4.00 percent with a point of 0.7 during week ending June 18, and 4.04 percent seven days before that.
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 -- and vice versa. Those forecasts are especially perilous when the future prospects of economies around the world are so hard to judge, and volatility is a feature of most markets. 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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