August 28, 2015 03:35 AM Eastern
Mortgage Rate Lock Recommendation
August 27 2015
Lock if closing in 7 days:Rates may be heading Up
Float if closing in 15 days:Rates may be heading down
Float if closing in 30 days:Rates may be heading down
Three pieces of huge news today. Together, they were creating a modest upward trend in mortgage rates at 10:00am (ET).
First, revised GDP figures for the second quarter were released. It was expected that the headline measure would increase to an annualized rate of +3.2 percent, compared with the original estimate of +2.3 percent. It actually came in at 3.7 percent, better than even the most optimistic mainstream analysts' forecast.
Second, New York Federal Reserve President William Dudley yesterday lowered expectations of Fed rate rises next month, remarking those "seem less compelling to me than ... a few weeks ago."
The third piece of big news is that stock markets around the world seem to have settled down, with gains in China, elsewhere in Asia and in Europe, with more expected later in New York. What's being going on for the last few days? Well, after reading tens of thousands of words, many of them contradictory, on the effect on global markets of the Chinese economy's recent issues, this writer finally happened upon a brief and cogent explanation. Unsurprisingly, it didn't come from an economist. Kelsey Hayes writes for Politico in Washington DC, and her masterly analysis, in full, was:
But what do today's important developments mean for mortgage rates? Read on.
What's Going On?
The GDP figures would normally be expected to increase mortgage rates as they tempt those with money away from low-yield safe investments such as bonds and mortgages and into opportunities offering higher returns. A reduction in the supply of cash for home loans should push up rates.
Just days ago, William Dudley's remarks on Fed plans would almost certainly have pushed up mortgage rates significantly. They're likely still exerting an upward force. However, his comments were made before today's revised GDP figures were published, and those could see some influential Fed people change their minds again and support a September hike.
Today's calmer stock markets may see a weakening in the "safe-haven" effect, which typically occurs when investors are spooked: demand rises for low-risk investments, including government (especially U.S. Treasury) bonds and American mortgages. As the extra demand causes prices for these to rise, yields and rates inevitably – though maybe counterintuitively – fall. So a weaker safe-haven effect might see rates rise.
With all these upward pressures, why is LendingTree still recommending those with more distant closing dates float their rates? That certainly is a risky strategy, but it's because investors still face other fundamental problems, including: very low commodity prices (some, including oil, may be inching up, but they look set to remain depressed), global deflation and overheated equity markets. All that, and China's underlying issues still haven't gone away. Today's Greed and Fear Index from CNN Money, which tracks likely investor sentiment, may have inched up to 5 (it was 3 yesterday), but that's on a scale of 1-100, and represents extreme fear. A year ago it stood at 36. All this means the safe-haven effect could be back in coming days and weeks, pushing rates down again. Indeed, it's probably what's stopping them rising further and faster now.
The GDP news was by far the most important release today, but other data published this morning included:
- New weekly new jobless claims numbered 271,000, broadly in line with expectations, and 6,000 down on last week.
- Corporate after-tax profits for the second quarter totaled $1.824 trillion, a year-on-year increase of +7.3 percent.
- July pending home sales were expected to show a month over month increase of +1.0 percent, and actually came in at +0.5 percent. That's slightly disappointing, but hardly bad news.
- Oddly, perhaps, given all the coverage surrounding the global crisis, the Bloomberg Consumer Comfort Index was actually up a bit this week: to 42.0 from 41.1 last week.
Demand for yesterday's auctions of U.S. Treasury bonds was fairly low, something that might give a mild upward push to mortgage rates.
Recent Mortgage Rates
The average rate nationwide for a 30-year fixed-rate mortgage during week ending August 27 was 3.84 percent with an average 0.6 point, according to Freddie Mac's latest weekly survey, published this morning. The same rate averaged 3.93 percent during week ending August 20, and 3.94 percent seven days before that. This time last year, it was 4.10 percent. Freddie Mac's chief economist Sean Becketti observed:
Events in China generated eye-catching volatility in equity markets worldwide over the past week. Interest rates also rocked up and down -- although to a lesser extent than equities -- as investors alternated between flights to quality and bargain hunting among beaten-down stocks. Amidst all this confusion, the 30-year mortgage rate dropped to 3.84 percent, the lowest mark since May and the fifth consecutive week with a rate below 4 percent.
One of the characteristics of periods like this is their volatility. There's even less certainty out there now than there usually is.
Whether you decide to float or lock your rate is entirely a matter for you. There's a risk in doing either. Those who are financially conservative may prefer to lock now. They'd be trading the possibility of a better rate in a few days or weeks for the security of fixing what should still today be a great one, at least in historical terms. Those who enjoy a bet might prefer to float in the hope their rate will fall before they close.
"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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