May 28, 2015 07:49 AM Eastern
Mortgage Rate Lock Recommendation
May 27 2015
Float if closing in 7 days:Rates are up
Float if closing in 15 days:Rates are up
Lock if closing in 30 days:Rates are down
Economic data released earlier today for once exceeded or were roughly in line with analysts' expectations. At -0.5 percent, April durable goods numbers were as anticipated. However, once volatile commercial aircraft orders were stripped out, they showed a rise of +0.5 percent. Better yet, previous months' poor figures were revised up.
Meanwhile, April new home sales increased to a seasonally adjusted annualized rate of 517,000, up 6.8 percent on the revised March figure. And the Case-Shiller 20-City Composite index for March, which measures home prices, gained 5.0 percent year-over-year.
Friday saw Federal Reserve chairperson Janet Yellen wade into the great economic debate that's recently been a regular feature of these rate lock recommendations. That debate divides economists into two camps.
On the one hand are the optimists, who believe that the weak first quarter and so-far generally disappointing April data are results of exceptional factors, that the economy's fundamentals are sound and that normal growth should resume soon. On the other are the pessimists, who remain deeply concerned that the strong dollar is significantly and adversely affecting trade and growth.
Ms. Yellen is firmly on the side of the optimists. In her speech, she dubbed the poor first quarter "statistical noise," spoke of "the waning of the headwinds" and suggested "the U.S. economy seems well positioned for continued growth."
It would be good to think Ms. Yellen is right, and she may well be. However, some will no doubt wish to wait for less gloomy economic data before finally switching to her camp. Meanwhile, her remarks were widely seen as a signal that U.S. interest rates are likely to increase later this year, and that saw the dollar rise across a range of currencies overnight.
That only made the already stubbornly strong dollar stronger, something that makes the going tough for American companies selling in foreign markets. Overnight, the yen hit a seven-year low.
True, on the U.S. Dollar Index (DXY), the American currency has fallen back from its 52-week high of 100.39 reached in mid-March. But, when it closed on Friday at 96.14, it was still way up on its 52-week low of 79.74, reached at the end of last June. Indeed, leaving aside the last couple of months, it's much higher than it has been over the last decade. In early trading this morning, it peaked at 97.21.
Getting the dollar down and keeping it there could be about to get harder if the crisis in Greece turns nasty and causes a rush of funds out of the euro. That grew more likely over the weekend when Greek interior minister Nikos Voutsis told a TV show, "The four installments for the IMF [International Monetary Fund] in June are €1.6bn. This money will not be given and is not there to be given."
A Greek default, if one indeed occurs, may cause the value of the dollar to rise even more sharply against the euro. That would inevitably harm American competitiveness and growth. However, it could have a more benign impact on U.S. mortgage rates, at least in the short term.
Spooked investors tend to see the United States as a haven for their money during times of upheaval, and an influx of their cash could affect the American bond and other markets, including the one for mortgages. In particular, 10-year U.S. Treasury bonds are important, because they're the ones that compete most directly for investors' money with the residential mortgage market.
At close on Friday, yields for those stood at 2.21 percent, which was 6 basis points below Wednesday's figure. However, that's still elevated compared with the 2015 average, and only 7 basis points shy of this year's high. Although mortgage rates don't directly shadow these 10-year bond yields, there is a relationship between them.
The occasional looseness of that relationship was underscored by the fact that average mortgage rates remained essentially flat -- in spite of those bond yields spiking -- during the week ending May 21, according to Freddie Mac's latest weekly rate figures. The average rate for a 30-year fixed-rate mortgage fell back by a single basis point to 3.84 percent with a 0.7 point. However, that is still not far off the 2015 high.
For now, LendingTree isn't changing its current mortgage rate lock recommendations. However, in the event Greece does default, exit the euro or both, that may well change.
Forecasting the direction of mortgage rates is difficult at the best of times. Something that might generally push them up (bad economic news, say) can also exert a downward force (because investors tend not to fear inflation or have as many attractive options when times are tough) -- and vice versa. Those forecasts are especially perilous when the future prospects of the American and other economies are so hard to judge. However, absent shock developments, few expect significant or rapid 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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