February 11, 2016 03:50 AM Eastern
Mortgage Rate Lock Recommendation
February 10 2016
Lock if closing in 7 days:Rates may be heading up
Lock if closing in 15 days:Rates may be heading up
Float if closing in 30 days:Rates may be heading down
No important domestic economic data were published this morning. However, Federal Reserve chair Janet Yellen will be making a presentation to the House Financial Services Committee on Capitol Hill later. The text of her remarks, released in advance earlier, suggests she'll be dovish about future rate hikes: She says the policy that governs those "is by no means on a preset course." And she suggests global turbulence could hit U.S.growth. Neither remark is likely to reassure already spooked markets.
With Chinese stock markets closed for new year, Japan set the tone overnight with another bout of heavy losses. However, Europe has been much calmer, and all the major markets there were showing gains at approaching 10:00am (ET). At that same time, the Dow Jones industrial average was up – but only by +0.52 percent. The oil price was down again, and at $27.64 was well below the psychologically important $30/barrel level.
Soon after 10:00am (ET), yields on 10-year U.S. Treasury bonds, which are closely tied to mortgage rates, were up, though not dramatically. 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 (but see "Yesterday," below), they slow, accelerate or reverse sufficiently often that they can't be relied upon as a basis for making important financial decisions. During unstable times, such as these, they are even less reliable.
As (so far with masterly understatement) the Wall Street Journal warned in January, this could be a "volatile year in global markets." There's always a risk in choosing to float or lock your rate, but it's more acute in volatile environments. True, there are opportunities for rich rewards if rates fall substantially, but there is also a continuing danger of being trapped in an upward cycle that doesn't end before you have to lock your rate.
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 in historical terms. 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.
That advice applies to all readers, even though LendingTree suggests that those with longer to wait before they must lock might prefer to continue to float. That recommendation is not based on any special insights concerning how mortgage rates might move, but merely on the calculation that there's a greater chance – amid the current volatility – of significant falls within 30 days than 15. Such falls may not occur at all, and it's perfectly possible rises will predominate over that period.
Average rates for 30-year fixed-rate mortgages (FRMs) fell by 7 basis points (a basis point is 1/100th of 1 percent) yesterday, according to Mortgage News Daily. That brings them to their lowest level in more than a year.
Something strange happened yesterday. Normally, as described above, mortgage rates move fairly closely in line with yields on 10-year U.S. Treasury bonds. But rates plunged 7 basis points on Tuesday while yields fell (having been higher earlier in the day) by less than 1 basis point. That's really quite unusual, though not unique. What may have happened is that those who monitor financial markets in order to set rates were overwhelmed by the extreme volatility seen on Monday, and caught up with reality yesterday. The lesson to draw from this is that the disclaimers in this column aren't there just to keep lawyers happy: It really is very difficult to forecast even hours ahead when markets are so volatile. The last couple of days have played havoc with LendingTree's pretty respectable record for making good calls. Apologies to readers who took the advice here only to regret it later.
The Bigger Picture
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 safe 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 and drives up rates. That's not to say the Federal Reserve doesn't influence mortgage rates; just that it does so only indirectly.
Looking beyond, one hopes, the period covered by these mortgage rate lock recommendations, some economists are predicting a new worldwide recession, which might see mortgage rates fall even further. British newspaper The Daily Telegraph ran an extensive feature over the weekend that warned: "A pernicious cycle of collapsing commodities, corporate defaults and currency wars looms over the global economy." And last week, a Citigroup research note used the term "death spiral" in relation to markets. Others see a less cataclysmic but still worrying future. The Guardian's website ran an article on Sunday by Nouriel Roubini, who is professor of economics at New York University's Stern School of Business, and who suggested, "Welcome to the new abnormal for growth, inflation, monetary policies and asset prices. Make yourself at home. It looks like we'll be here for a while."
However, not all economists are so gloomy. On Monday morning, Goldman Sachs estimated the chance of the United States experiencing a recession in the next four quarters at 15 percent, and the bank "is betting 'Mr. Market' is wrong in its recession warnings," according to Bloomberg. Later that same day, Comerica Bank chief economist Robert A. Dye said in an email, "We believe that household balance sheets will be a source of strength and stability for the U.S. economy in 2016, even with the choppy start to the year." Indeed, many experts expect American mortgage rates to edge up early this year and to stay a little higher than at present. For example, in its current Housing Forecast, published January 11, Fannie Mae's economics team predicted that those for 30-year FRMs will average 4.0 percent in the current quarter, 4.1 percent in the following two, and 4.2 percent in the last quarter of 2016.
Recent Mortgage Rates
The average rate nationwide for a 30-year FRM during the week ending February 4 was 3.72 percent with an average 0.6 point, according to Freddie Mac's latest weekly survey. The same rate averaged 3.79 percent during the week ending January 28, and 3.81 percent seven days before that. This time last year, the average 30-year FRM came in at 3.59 percent.
"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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