May 27, 2016 02:07 PM Eastern
Mortgage Rate Lock Recommendation
May 27 2016
Lock if closing in 15 days:Rates may be heading up
Don't forget, Monday is Memorial Day, so markets will be closed and this column will not appear.
It looks as if mortgage rates might hold steady today or maybe edge up a bit. However, that forecast is based on early market trends, and those can turn on a dime, so there are never any guarantees with these predictions. Still, were we to be buying a home in May or June, we'd lock our rate if closing with 15 days, but float it if we had longer to wait. Read on for more.
The big news today is this morning's release of the second (of three) estimates of gross domestic product (GDP) for the first quarter of 2016. The quarter-over-quarter change, expressed as a seasonally adjusted annualized rate, was +0.8 percent, compared with the initial reading of +0.5 percent. Before today's publication, most economists and analysts had expected an upward revision of the first estimate to +0.9 percent, according to Econoday, so this will be only very slightly disappointing news to markets.
Federal Reserve chair Janet Yellen will be speaking in public at Harvard University at lunchtime, after this column's deadline, and her remarks always have the potential to move markets and mortgage rates. Any such movements will probably depend on whether she changes perceptions of the likelihood of the Fed hiking its interest rates next month. The greater that likelihood, the higher mortgage rates might move today.
At about 10:00am (ET), yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were slightly up, though that was hardly a convincing trend. 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.
Major foreign stock-market indexes around the world were mixed earlier. Fifty-five minutes after opening, the S&P 500 was up by +0.23 percent. At 10:29am (ET), crude oil prices stood at $49.20/barrel, compared with the $49.66/barrel seen at roughly the same time yesterday.
Recent Mortgage Rates
Average rates for 30-year fixed rate mortgages (FRMs) fell yesterday by 2 basis points (a basis point is 1/100th of 1 percent – see below for a more detailed explanation), according to Mortgage News Daily. That returns them to where they were last Thursday and Friday.
The average rate nationwide for a 30-year FRM during the week ending May 26 was 3.64 percent with an average 0.5 point, according to Freddie Mac's weekly survey, published yesterday morning. It was 3.58 percent during the week ending May 19, and 3.57 percent seven days before that. This time last year, the average 30-year FRM came in at 3.87 percent.
In a statement accompanying the latest data, Freddie Mac chief economist Sean Becketti explained:
U.S. Treasury yields moved up in response to the Fed minutes release, which kept alive the possibility of a summer rate-hike. Mortgage rates followed, with the 30-year fixed-rate mortgage increasing 6 basis points to 3.64 percent. Despite this increase, May ends the month averaging only 3.60 percent, 1 basis point below April's average, and the lowest monthly average in 3 years.
Although the high volatility seen earlier in the year seems to have largely evaporated, the last few weeks suggest it may not have disappeared entirely. In any event, there's always a risk in choosing to float or lock your rate. True, there are opportunities for rewards should rates fall, 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 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.
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 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 the 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 sometimes they drift apart a little.
Some Questions Answered
Why, counterintuitively, do 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.
Do we really need to go on about analysts' consensus forecasts when we report 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 that 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 (May) Housing Forecast, Fannie Mae predicts the rate for 30-year FRMs will average 3.6 percent this quarter, and rise to 3.7 percent through the following nine 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 last week, they forecast that rates for 30-year FRMs will average 3.9 percent "for full year 2016." Given those rates have been much lower than that for all but one week so far this year, they'd have to climb to 4.0 percent and above in coming months to achieve that average. And the Mortgage Bankers Association seems to concur. In its latest Mortgage Finance Forecast, it reckons that same average rate will creep up each quarter for the foreseeable future, reaching 4.1 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 future.
"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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