April 30, 2016 05:01 AM Eastern
Mortgage Rate Lock Recommendation
April 29 2016
Lock if closing in 7 days:Rates may be heading up
Lock if closing in 15 days:Rates may be heading up
Mortgage rates might rise again today after recent falls, judging by early trends in global markets. However, those trends have been particularly unstable and unpredictable over the last 48 hours or so, and there are even fewer certainties in that forecast than usual. Still, were we buying a home in April or May, we would err on the side of caution and lock our rate if we were having to close within 15 days, but would float it if we had longer to wait. You may legitimately prefer to gamble on further falls. Read on for more.
The sole market-moving report of domestic economic data published this morning concerned personal income and outlays in March. This report breaks down into three key components, all of which are expressed as month-over-month changes:
- Personal income – These rose +0.4 percent in March. They'd increased +0.2 percent in February, and many analysts had expected to see a +0.3 percent rise this morning, according to Econoday. So today's number is good. The Bureau of Labor Statistics expanded on the news, saying, "Compensation costs increased 0.6 percent for civilian workers, seasonally adjusted, from December 2015 to March 2016."
- Consumer spending – This rose +0.1 percent, the same as February's change, but a shade below the analysts' consensus forecast of +0.2 percent. That's only a little disappointing.
- Core personal consumption expenditures (PCE) price index – This rose +0.1 percent in March, again the same as the previous month, but also this time in line with analysts' expectations. This is especially important because it's one of the key indicators considered by the Federal Reserve when it's deciding its interest rate policies. So no surprises there.
Like yesterday, major stock-market indexes around the world were almost all down earlier today, though only those is Tokyo were sharply lower. About 20 minutes after opening, the Dow Jones industrial average was down too, by -0.5 percent. At about 9:35am (ET), crude oil prices stood at $46.65/barrel, which compares with the $45.49/barrel seen at roughly the same time yesterday.
Meanwhile, at about 9:45am (ET), yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were higher, though not sharply so. They'd been lower earlier in the morning, suggesting turbulence in this market. 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.
Recent Mortgage Rates
Average rates for 30-year fixed-rate mortgages (FRMs) fell 5 basis points (a basis point is one-hundredth of 1 percent) yesterday, according to Mortgage News Daily. That outcome looked unlikely this time yesterday, which illustrates just how unpredictable movements in mortgage rates currently are.
The average rate nationwide for a 30-year FRM during the week ending April 28 was 3.66 percent with an average 0.6 point, according to Freddie Mac's latest weekly survey, published yesterday. It was 3.59 percent during the week ending April 21, and 3.58 percent seven days before that. This time last year, the average 30-year FRM came in at 3.68 percent.
Freddie Mac's chief economist Sean Becketti commented in a statement that accompanied yesterday's data:
Treasury yields marched higher this week. As a result, the 30-year mortgage rate jumped 7 basis points to 3.66 percent. The Federal Reserve's decision to leave the Federal funds rate unchanged triggered a 9 basis point drop in the 10-year Treasury yield on Wednesday, however the drop occurred too late to impact this week's survey.
Although the high volatility seen earlier in the year seems to have largely evaporated, the last week suggests it may not have disappeared altogether. And there's certainly still a chance of sharpish movements today. In any event, there's always a risk in choosing to float or lock your rate. True, there are opportunities for rewards if 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 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.
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 loans and drives up rates. A second influence is 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 influence 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. Usually, the relationship between 10-year bond yields and mortgage rates is surprisingly close, though sometimes they drift apart a little.
Why 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 fixed amount of money, the lower the yield you're going to get. That's a mathematical inevitability.
The Longer Term
In its latest (April) Housing Forecast, Fannie Mae predicts the rate for 30-year FRMs will average 3.7 percent throughout 2016, inch up to a 3.8 percent average for the first three quarters of 2017 and go on to 3.9 percent during the last quarter of next year. As recently as January, Fannie was predicting that rate would average 4.1 percent in the current and third quarter, and 4.2 percent in the last quarter of 2016. You may prefer to see the newer numbers as a sign of how difficult it is to forecast rates in a challenging economic environment, rather than as a reliable guide to the future.
Freddie Mac's economists are less optimistic. Last Friday, they predicted, "After lowering the forecast for subsequent quarters by a tenth of a percent, expect rates to average 4 percent in 2016." And CoreLogic seems to concur. Last week, it published its monthly MarketPulse report, and, referring to the influences that are depressing mortgage rates, its chief economist Dr. Frank Nothaft wrote, "These forces will likely be temporary, and long-term interest rates are expected to gradually move higher in the second half of this year."
"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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