What’s driving current mortgage rates?
Average mortgage rates today rose significantly. Bond prices, after taking a hit following the end of yesterday’s Federal Reserve meeting, fell (bad for rates), and then recovered somewhat but not entirely.
|Conventional 30 yr Fixed||5.163||5.175||Unchanged|
|Conventional 15 yr Fixed||4.75||4.769||+0.04%|
|Conventional 5 yr ARM||4.625||5.091||+0.02%|
|30 year fixed FHA||4.917||5.928||Unchanged|
|15 year fixed FHA||4.188||5.142||+0.06%|
|5 year ARM FHA||4.313||5.545||Unchanged|
|30 year fixed VA||5.0||5.2||+0.04%|
|15 year fixed VA||4.313||4.631||+0.06%|
|5 year ARM VA||4.5||4.816||Unchanged|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
This morning’s November Producer Price Index (PPI), which shows costs at the manufacturing level, caused some concern for borrowers. Experts anticipated a .2 percent increase from September, but we got .6 percent. However, stripping out the more volatile elements revealed that the core rate increase was just .2 percent. That’s a more important number, and less discouraging for mortgage borrowers.
October’s Survey of Consumer Sentiment, which measures consumers’ likelihood of major purchases in the near future, nearly nailed expectations, coming in at 98.3, having little effect on mortgage interest rates. Analysts had projected a decrease from 98.6 to 98.2.
Financial data affecting today’s mortgage rates
We are looking at a mixed bag of financial data — the most important being stocks, oil and Treasuries. Two of the three are coming up good for rates. I would not be surprised to see re-pricing for better later today, barring any unforeseen global / political / Twitter events.
- Major stock indexes opened lower (good for rates)
- Gold prices fell $15 to $1,211 an ounce. (That is bad 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 to $59 a barrel (good for rates because energy prices play a large role in creating inflation)
- The yield on ten-year Treasuries increased 2 basis points (2/100th of 1 percent) to 3.22 percent. That’s bad for borrowers because mortgage rates tend to follow Treasuries
- CNNMoney’s Fear & Greed Index fell back 8 points to 21 (out of a possible 100). That score moved from the “extreme fear” range to just plain old “fear.” But the direction (downward) is good for rates. “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite
Rate lock recommendation
Normally, the Friday in advance of a three-day weekend is not the best time to lock. Mortgage lenders tend to price higher then. Hopefully, many of you took advantage of yesterday’s blip and locked in a good rate. Those who didn’t may want to wait until Tuesday.
Mortgage rates are likely to increase in the months following the election. Statistics show that the economy and interest rates tend to heat up in the 12 months after an election no matter who wins. But rates were already on a tear leading up to this election, and putting the mid-term to bed allowed things to settle down in the immediate aftermath.
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 your 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
This week brings few scheduled economic reports pertaining to mortgage rates. But we do have this small matter of a national election on Tuesday.
- Monday: Nothing
- Tuesday: US national mid-term election and a Treasury auction of 10-year Notes. Demand for these notes could affect mortgage rates; high demand would cause the prices of bonds and mortgage-backed securities to rise and yields (rates) to fall. The opposite is also true.
- Wednesday: Treasury auction of 30-year Notes
- Thursday: Federal Open Market Committee statement, in which the Fed may provide clues about its future projections and actions regarding interest rates. They are not expected to raise interest rates at this time
- Friday: Producer Price Index (PPI), which shows costs at the manufacturing level. Increases eventually find their way to the consumer level and eventually increase costs, which tends to push interest rates as well. Experts anticipate a .2 percent increase from September. More would be bad for rates, less would be good. In addition, the University of Michigan releases its preliminary Survey of Consumer Sentiment, which measures consumers’ likelihood of major purchases in the near future. High is bad for rates, low is good. Analysts project a decrease from 98.6 to 98. However, the election results could change this.
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.
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.