May 30, 2015 12:22 PM Eastern
Mortgage Rate Lock Recommendation
May 29 2015
Float if closing in 7 days:Rates may be heading down
Float if closing in 15 days:Rates may be heading down
Lock if closing in 30 days:Rates may be heading up
Although today's second estimate of U.S. GDP for the first quarter of 2015 was awaited with great anticipation, it's unlikely to have a lasting impact on markets, because it's a "rear-view mirror" measure. A downward revision into negative territory was widely expected, and the -0.7 percent seasonally adjusted annualized rate reported this morning by the Bureau of Economic Analysis wasn't a huge surprise. In the hour following the announcement, the Dow Jones industrial average fell by 0.2 percent, but began to climb again soon after.
In a speech last Friday, Federal Reserve chairperson Janet Yellen set the tone for economic sentiment with an optimistic line. She dubbed the first quarter "statistical noise," spoke of "the waning of the headwinds" and suggested "the U.S. economy seems well positioned for continued growth."
True, today's University of Michigan consumer surveys (final data for May) hardly support Ms Yellen's case, but she has a loud voice that markets listen to, and Fed chairpeople may be wrong slightly less often than lay consumers. The surveys' publishers observed:
Although the loss in confidence narrowed in late May, the decline for the month as a whole was still substantial as consumers have adopted more modest prospects for a rebound following the economy's dismal 1st quarter performance.
In news that suggests many consumers are more optimistic than that, the National Association of Realtors yesterday revealed pending home sales in April were running at their fastest rate in nine years.
Greece continues to be a source of great concern, as it plays chicken with default. Its government has been negotiating -- so far unsuccessfully -- with creditors ahead of a €300 million ($329 million) payment due to the International Monetary Fund on June 5. Greek ministers have made clear they are unable or unwilling to make the payment, and the consequences of a default and possible exit from the Eurozone could spread across Europe and beyond. This could see investors pouring money into the perceived haven provided by U.S. markets, which should drive bond yields down.
Ten-year U.S. Treasury bonds are particularly important, because they're the ones that compete most directly for investors' money with the residential mortgage market. And yields for those are already down. They closed yesterday at 2.13 percent, one basis point below Tuesday's and Wednesday's level. That's well below both last Friday's 2.21 percent and the 2015-high of 2.28 percent reached the week before last.
The relationship between 10-year bond yields and mortgage rates is close, but far from perfect. That was illustrated by the fact that average mortgage rates remained essentially flat -- in spite of those bond yields spiking -- during the week ending May 21.
However, according to Freddie Mac's latest weekly rate figures, published yesterday, the average rate for a 30-year fixed-rate mortgage climbed to 3.87 percent with an average 0.6 point during week ending May 28. Perhaps those bond spikes just took a while to feed through, because overall average mortgage rates reached a 2015-high that week.
In spite of that high providing plenty of opportunities for small falls, floating until nearer to your closing date in the hope of a lower mortgage rate is still a risk. A flurry of poor domestic data (stand by for income and spending, construction spending and ISM manufacturing index numbers on Monday), or resolution of the Greek crisis or any one of a number of other factors could reverse the anticipated trend. However, on the balance of probabilities, it seems more likely that rates will inch down over the next couple of weeks. Beyond that, and amidst so much uncertainty, the future is opaque. However, there are some grounds to expect rates to rise again over that longer period, and LendingTree is, for now, sticking to its Lock recommendation for those closing in 30 days.
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 and demand for loans is lower 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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