July 25, 2016 07:52 AM Eastern
Mortgage Rate Lock Recommendation
July 22 2016
Lock:Rates may be heading up
As yesterday, early market trends this morning suggest mortgage rates might inch up today or maybe hold steady. However, those trends often change as the day progresses, so falls remain possible. With those rates still exceptionally low by any standards, we would avoid the risk of future rises and lock our rate today, if we were currently buying a home. But those with stronger nerves and longer to wait before closing may prefer to gamble in the hope of a resumption of recent downward movements in coming days and weeks. Read on for more.
Foreign influences continue to partly drive trends in markets and mortgage rates, especially on days like today when there are no releases of domestic "market moving indicators" published.
At approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were a little higher. 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. And, as we've seen recently, the relationship between those and mortgage rates can sometimes become elastic.
Major foreign stock-market indexes were lower across Asia and mixed in Europe earlier, though only moderately so. Twenty-eight minutes after opening, the Dow Jones industrial average was down by -0.13 percent. At 9:50am (ET), crude oil prices stood at $44.42/barrel, compared with the $45.61/barrel seen at roughly the 10:04am (ET) yesterday.
Recent Mortgage Rates
The average rate for 30-year fixed-rate mortgages (FRMs) yesterday crept up by 2 basis points (a basis point is one-hundredth of 1 percent – see below for a longer explanation), according to Mortgage News Daily. That means that average was 16 basis points lower than it was on June 23, when the Brexit (British exit from the European Union) referendum was held. It remains very low by historical and all but the most recent standards.
The average rate nationwide for a 30-year FRM during the week ending July 21 was 3.45 percent with an average 0.5 point, according to Freddie Mac's latest weekly survey, published yesterday morning. It was 3.42 percent during the week ending July 14, and 3.41 percent seven days before that. This time last year, the average 30-year FRM came in at 4.04 percent.
Freddie Mac chief economist Sean Becketti remarked in a statement accompanying the latest data:
Post-Brexit volatility tapered off over the last two weeks, allowing interest rates to bounce back a bit from their record (10-year Treasury yield) and near-record (30-year mortgage rate) lows. ... With the Federal Reserve on hold and the UK monetary authority taking at least a one-month breather, we don't expect any significant movement in mortgage rates in the near-term. This summer remains an auspicious time to buy a home or to refinance an existing mortgage.
There remains a risk in choosing to float or lock your rate. True, there are opportunities for rewards should rates fall further, 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 could potentially be a near-record breaking mortgage deal. 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.
Why Mortgage Rates Move
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 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 rates tend to be less volatile, and sometimes the two drift apart a little.
Some Questions Answered
Why, counterintuitively, do bond 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.
Why go on about "analysts' consensus forecasts" when reporting 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 the one 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 (July) Housing Forecast, published yesterday, Fannie Mae predicts the rate for 30-year FRMs will average 3.5 percent this quarter and over the following nine months, and then inch up to 3.6 percent through the last two quarters of 2017.
This month, Freddie Mac's economists have become noticeably less pessimistic than they have been recently. In their July Outlook report, they forecast that those 30-year FRMs will average 3.6 percent over the whole of this year, and 4.0 percent during 2017. That's very different from last month, when they expected significantly sharper rises.
The Mortgage Bankers Association also lowered its expectations of rate rises in its July Mortgage Finance Forecast. However, it remains more pessimistic than the others, and now reckons that same average rate will creep up most quarters in the foreseeable future, reaching 3.8 percent in the last three months of this year, starting 2017 with a quarterly average of 4.0 percent and ending it with one of 4.4 percent.
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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