#Lowest #mortgage #rates
Lowest mortgage rates
How Are Mortgage Rates Determined?
The Mortgage Rates Puzzle
- A lot of factors go into deciding your mortgage rate
- Things like credit score are huge
- As are down payment, property type, and transaction type
- Along with any points you’re paying to obtain said rate
- The state of the economy will also come into play
Simply put, the more you know, the better you’ll be able to negotiate! Or call out the nonsense…
Jump to mortgage rate topics:
To put it in perspective, a change in rate of a mere .125% (eighth percent) or .25% (quarter percent) could mean thousands of dollars in savings or costs annually. And even more over the entire term of the loan.
Mortgage rates are offered in eighths.
- Mortgage rates are generally offered in eighths
- If it’s not a whole number like 4% or 5%
- Expect something like 4.125% or 5.25%
- Or a promotional rate ending in .99%
In other words, when you’re ultimately offered a rate, it will either be a whole number, such as 5%, or 5.125%, 5.25%, 5.375%, 5.5%, 5.625%, 5.75%, or 5.875%. The next stop after that is 6%, then the process repeats itself.
3.75% 3.875% 4% 4.125% 4.25% 4.375% 4.5% 4.625%
So, how are mortgage rates set?
- There are a variety of factors, including the state of the economy
- Related bond yields like the 10-year Treasury
- And lender and investor appetite for MBS
- Along with borrower/property-specific loan attributes
Although there are a variety of different factors that affect interest rates, the movement of the 10-year Treasury bond yield is said to be the best indicator to determine whether mortgage rates will rise or fall. But why?
Though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years, so the 10-year bond is a great bellwether to gauge the direction of interest rates.
Treasuries are also backed by the “full faith and credit” of the United States, making them the benchmark for many other bonds as well.
Additionally, 10-year Treasury bonds, also known as Intermediate Term Bonds, and long-term fixed mortgages, which are packaged into mortgage-backed securities (MBS), compete for the same investors because they are fairly similar financial instruments.
However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as payment default and early repayment, and thus carry more risk and must be priced higher to compensate.
How will I know if mortgage rates are going up or down?
- An easy way to guess the direction of mortgage rates
- Is to look at the yield on the 10-year Treasury
- If it goes up, expect mortgage rates to rise
- If it goes down, expect mortgage rates to drop
Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.
10-Year Bond Yield vs. Mortgage Rates
– 10-year bond yield up, mortgage rates up.
– 10-year bond yield down, mortgage rates down.
You can find it on finance websites alongside other stock tickers, or in the newspaper. If it’s moving higher, mortgage rates probably are too. If it’s dropping, mortgage rates may be improving as well.
To get an idea of where 30-year fixed rates will be, use a spread of about 170 basis points, or 1.70% above the current 10-year bond yield. This spread accounts for the increased risk associated with a mortgage vs. a bond.
So a 10-yr bond yield of 4.00% plus the 170 basis points would put mortgage rates around 5.70%. Of course, this spread can and will vary over time, and is really just a quick way to ballpark mortgage interest rates.
There have been, and will be periods of time when mortgage rates rise faster than the bond yield, and vice versa. So just because the 10-year bond yield rises 20 basis points (0.20%) doesn’t mean mortgage rates will do the same.
Economic activity impacts mortgage rates.
- Keep an eye on the economy as well
- If things are humming along, mortgage rates may rise
- If there’s fear and despair, low rates may be the silver lining
- This all has to do with inflation
As a rule of thumb, bad economic news brings with it lower mortgage rates, and good economic news forces rates higher. Remember, if things aren’t looking too hot, investors will sell stocks and turn to bonds, and that means lower yields and interest rates.
Inflation also greatly impacts home loan rates. If inflation fears are strong, interest rates will rise to curb the money supply, but in times when there is little risk of inflation, mortgage rates will most likely fall.
What other factors move mortgage rates?
- Supply can be an issue as well
- If lenders are super busy, rates may be higher
- If business is slow, they may lower rates to gain a competitive advantage
- Rates also differ by lender and can diverge more during times of economic stress
Issues such as supply come to mind. If loan originations skyrocket in a given period of time, the supply of mortgage-backed securities (MBS) may rise beyond the associated demand, and prices will need to drop to become attractive to buyers.
But if there is a buyer, such as the Fed, who is scooping up all the mortgage-backed securities like crazy, the price will go up, and the yield will drop, thus pushing rates lower. This is why today’s mortgage rates are so low.
How YOU and Your Property Affect Mortgage Rates
- That super low advertised mortgage rate sure looks good
- But be sure to check out the fine print
- You probably have to be an A+ borrower
- And you might need to pay discount points too
Generally, a lender will showcase a mortgage rate that requires perfect credit, a 20% down payment, and is only available on an owner-occupied single-family home, as seen in my fictitious mortgage rate ad illustration above.
In other words, YOU and your property matter as well. A lot!
Things like a poor credit score and a small down payment could lead to a much higher mortgage rate, whereas borrowers with stellar credit and plenty of assets may get access to the lowest fixed rates available.
One of the most important factors that you can control is your credit score, so if you can at least get a handle on that and work to keep your scores above 760, your pricing should be optimal, all else being equal.
Rates can also vary substantially based on how much a certain lender charges to originate your loan. So the final rate can be manipulated by both you and your lender, regardless of what the going rate happens to be.
Lastly, note that there are a variety of different loan programs available with different interest rates. Are we talking about a 30-year fixed rate or an adjustable-rate mortgage, the latter of which will have a lower interest rate. Loan type and loan amounts can play a big role here.
Freddie Mac’s Weekly Mortgage Rate Survey (updated 3/28/19)
The data is collected Monday through Wednesday, so they aren’t necessarily going to match up with today’s mortgage rates if rates increased or fell from then until now. Consider this a starting point:
1-Year ARM: no longer tracked as of 2016.
Since 1971, Freddie Mac has conducted a weekly survey of mortgage rates. These are average home loan rates gathered from banks and lenders throughout the nation for conventional, conforming mortgages with an LTV ratio of 80 percent (20% home equity or down payment).
This is the case because the 30-year fixed rate never changes, and it’s offered for a full three decades. So you pay a premium for the stability and lack of risk, and the opportunity to refinance if rates happen to go down.
When it comes to 20-year mortgage rates, you might be looking at something in between the 30-year and 15-year, such as a quarter percent (0.25%) below the 30-year fixed. The shorter term means you’ll also save a ton on interest.
Rates on ARMs are discounted at the outset because you only get a limited fixed period before they become adjustable, at which point they generally rise.
You can use these average rates as a starting point when determining what rate you might be offered. If your particular loan scenario is higher risk, whether it’s a higher LTV and/or a lower credit score, it will probably be priced higher.
If you’re looking for current mortgage interest rates, you can take a gander at these weekly averages to see both the direction of rates and the ballpark figures to at least get an estimate of what you might receive at any given time.
Record Low Mortgage Rates
- Mortgage rates hit record lows (per Freddie Mac)
- In late 2012 and early 2013
- The 30-year fixed reached 3.31% at its lowest point on Nov 21st, 2012
- The 15-year fixed reached 2.56% at its lowest point on May 2nd, 2013
In late 2012 and early 2013, fixed mortgage rates hit all-time record lows. The 30-year fixed, as tracked by Freddie Mac, hit its lowest point ever during the week ended November 21, 2012, falling to 3.31%. Since then, it has risen fairly steadily.
The 15-year fixed hit a record low 2.56% during the week ended May 2, 2013, the lowest point since tracking began in 1991. It too has risen since hitting its low point. During the same week, the 5/1 ARM also hit its all-time record low of 2.56%, though records only date back to 2005.
Mortgage Rate Predictions for 2019 and 2020
Take them with a grain of salt because they’re not necessarily accurate, just forecasts for future movement.