Mortgage rates should be the result of such things as your credit score, down payment and loan term but in the real world it doesn't quite work that way. There are other factors involved in mortgage pricing and they have very little to do with an individual loan or a particular house, instead they're simply reactions to the day's news.
For instance, in 2012, interest rates hit historic lows, reaching 3.31 percent, rates not seen in 65 years. The low rates more or less carried into 2013 but then things quickly changed: mortgage rates for 30-year fixed-rate financing stood at 3.35 percent on May 2nd and rose to 4.46 percent by June 27th.
The Mortgage Rate Rumor Mill
A rumor started that the Federal Reserve was going to stop the purchase of financial securities, purchases then running at the rate of $85 billion per month. In June, Fed Chairman Ben Bernanke announced that the Fed was likely to start "tapering" monthly purchases -- in September.
Notice the interest rate impact: Rates gained more than a full percentage point anticipating an event which was not going to begin for months, if at all. If you wanted to borrow $150,000 on May 2nd your monthly cost for principal and interest would have been $661.07 over 30 years. The same loan, locked in on June 27th, would have had a monthly expense of $756.47 -- a difference of $95.40 per month or an extra $1,145 per year.
You can look at the great tapering run-up and conclude that mortgage rates follow news events, even events which don't actually occur and may not occur. In other words, rates can change on the basis of both news and rumors.
The oddity with relating mortgage rates to news-and-rumors is that it's not a sure thing. Rates can also change despite news and rumors.
For instance, the Fed really has been tapering marketplace purchases in 2014. The result? If the rumor of tapering could force rates to rise then surely an actual end to Fed purchases should result in a sudden and swift rise in mortgage costs. Right?
Actually, no. Rates fell! In October, according to Freddie Mac, 30-year fixed-rate mortgage rates slipped below 4 percent.
How to Read the News
What do these examples tell us about the impact of news on mortgage rates?
First, the news can and does impact rates and that impact is real. Think of the borrower who financed in May 2013 and the one who went mortgage shopping in late June.
Second, rumor and hearsay also impact rates. Things which may or may not happen can cause rates to rise or fall.
Third, the impact of "news" or "non-news" is likely short term because there's always a new round of fresh news and rumors.
Fourth, regardless of the day's news the marketplace is independent -- think of those falling rates in October 2014.
Fifth, predictions of what will happen may be no more reliable than gusts of wind. For instance, the National Association of Realtors predicted that mortgage rates would reach 5.4 percent in 2014.
Sixth, when considering the news and economic forecasts it is always wise -- at least in this one case -- to consider the words of former Federal Reserve Chairman Alan Greenspan.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said."
Mortgage Rates and Strategies
What can you do to get the best rates in a world where the news is always in flux?
Here are the key steps to take:
First, shop around. Let lenders compete for your business.
Second, if you think rates are low or about as good as you are likely to get in the next six week and might go then lock-in your rate. Be sure to ask about lender lock-in policies -- some lenders allow a one-time re-lock if rates go lower before closing.
Third, if you think rates might go lower than consider the use of an ARM product such as a 5/1 mortgage, a loan with a fixed interest level for five years which then adjusts annually. Such ARMs are typically available with a significant discount. For instance, in mid-October the interest level for a 30-year fixed rate loan stood at 3.97 percent according to Freddie Mac while a 5/1 ARM was priced at 2.92 percent. However, be aware that ARM rates can change in the future, that they can go up.
Fourth, regardless of the news or non-news always present your best case to lenders. Have paperwork in hand, get pre-approved for a loan before looking for a home or making a formal refinancing application, and avoid new debt during the application process.