What’s driving current mortgage rates?
Mortgage rates today changed very little. Weekly Jobless Claims came in low, which is good for mortgage rates (experts predict 228,000, we got 214,000). The Consumer Price Index (up just .1 percent instead of the projected .2 percent) and Core CPI (up .2 percent as expected) provided a more optimistic look at inflation, good for rates.
|Conventional 30 yr Fixed||4.75||4.761||Unchanged|
|Conventional 15 yr Fixed||4.292||4.311||Unchanged|
|Conventional 5 yr ARM||4.25||4.737||Unchanged|
|30 year fixed FHA||4.417||5.423||-0.04%|
|15 year fixed FHA||3.688||4.638||Unchanged|
|5 year ARM FHA||3.938||5.166||Unchanged|
|30 year fixed VA||4.542||4.736||Unchanged|
|15 year fixed VA||3.75||4.063||Unchanged|
|5 year ARM VA||4.25||4.481||Unchanged|
Financial data affecting today’s mortgage rates
Most indicators are mixed, but I think the most important (oil especially) point to better rates. I would lock if closing soon, and perhaps wait if I had some lead time.
- Major stock indexes opened higherer (good for mortgage rates)
- Gold prices are nearly unchanged 18 to $1,248 an ounce. (That is neutral for mortgage rates. In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower)
- Oil prices dropped $2 (second straight day)to $70 a barrel (that’s very good for mortgage rates today, but when we blow through the $70 threshold, it’s not great long-term because energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries fell 1 basis point (/100th of 1 percent) to 2.85 percent. That is good for mortgage rates because mortgage rates tend to follow Treasuries and it’s happened six days straight.
- CNNMoney’s Fear & Greed Index dropped just 1 point to 44 (out of a possible 100). That is a very slightly more fearful direction, but still in the “neutral” range. Normally, “fearful” investors push bond prices up (and interest rates down) as they leave the stock market and move into bonds, while “greedy” investors do the opposite
This week offers a few pertinent economic releases. Most of the releases we get won’t be of major importance until Friday. Keep your eyes open.
- Monday: Nothing
- Tuesday: Nothing
- Wednesday: Producer Price Index measures inflation at the wholesale level. Analysts expect a .2 percent increase, More would be bad for rates, less would be good
- Thursday: Weekly Jobless Claims (experts predict 228,000), we also get the Consumer Price Index and Core CPI, important measures of inflation. Analysts expect both measures to increase, 2 percent, Higher would be bad for rates, and lower would be good.
- Friday: Consumer Sentiment Index for July. Predicted to rise from 98.2 to 98.7. Not great for rates if it goes higher, but could cause drops if it falls unexpectedly or fails to increase as planned. Optimistic consumers tend to spend, and that causes prices and mortgage rates to rise.
Rate lock recommendation
Rates are trending higher over the long-term, with occasional dips. Today’s economic indicators are mostly favorable, so if your rate dropped this morning, grab it.
In general, pricing for a 30-day lock is the standard most lenders will (should) quote you. The 15-day option should get you a discount, and locks over 30 days usually cost more. If you can get a better rate (say, a .125 percent lower rate) by waiting a couple of days to get a 15-day lock instead of a 30, it’s probably safe to consider.
In a rising rate environment, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer you lock, the higher your upfront costs. If you are weeks away from closing on your mortgage, that’s something to consider. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.
If you’re still floating, stay in close contact with your lender, and keep an eye on markets. I recommend:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
Video: More about mortgage rates
What causes rates to rise and fall?
Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying five percent interest ($50) each year. (This is called its “coupon rate.”) That’s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.
When rates fall
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is now five percent.
- Your interest rate: $50 annual interest / $1,000 = 5.0%
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.