Learning why mortgage rates rise and fall every day is key to knowing how and when to leverage your financial options. This information is helpful no matter your current ownership position. The following are some helpful tips, as well as historical perspective, to help you know what’s actually happening in the mortgage market:
- Historically speaking, mortgage rates are at record-lows. Nobody can predict this; they can only make educated guesses — which is why you should always be prepared to move quickly if a “rate opportunity” arises. Experts at investment firms, hedge funds, analytics companies, and economic consultancies get paid to predict this rate movement every day, and even they can get it wrong sometimes. Today’s 30-year mortgage interest rate has slowly dropped to a record low from a record high in 1981 (it took nearly 40 years). No one could’ve predicted rates would drop this low recently. Just remember: a highly liquid financial investment market like we have in the United States means mortgage rates go up and down constantly in the short term.
- Keep the 10-year rate for U.S. Treasury bond investments on your radar if you want to see which way 30-year and 15-year mortgage rates are moving. The average mortgage rate follows the 10-year treasury bond rate since investors lend money through the financial markets to make mortgages available to consumers (similar to when investors lend money to the U.S. government). One of several online trackers of treasury bond rates is the CNBC daily tracker. Mortgage rates usually go up or down simultaneously with the 10-year treasury — not completely in-line with each other, but very close. For instance, anyone who recently got a mortgage rate of 4 percent APR (annual percentage rate) means the U.S. government was borrowing money from investors via the 10-year treasury bond at about 1.8 – 2.2 percent APR in the days leading up to that consumer locking in his or her mortgage rate.
- The basics of refinancing. Most people are interested in lowering their interest rate to save money. On rare occasions, it may make sense to accept a higher rate to take cash-out of the equity built in your home to pay down debts with higher interest rates. If refinancing for a lower interest rate, it’s usually not worth refinancing unless the new mortgage rate is about 0.5 percent lower than what you currently have. Rates rise or fall by 1/8th-percent increments (or 0.125 percent). Every 0.125 percent down in a rate can equal an approximate $25 – $30 per-month savings on the principal/interest combination of your total monthly payment, although it depends on your personal credit and loan circumstance. Your debt-to-income and credit score impact the rate you are eligible for and it’s worth your effort to keep your credit healthy regardless of whether you are ready to buy or refinance your home or will in the future.
- Mortgage availability and homeownership is pretty high by historical standards, and most congressional lawmakers say they want to keep it this way. Today there are many investors looking to lend money with various different loan programs to make various households of many different income levels and even rural residents homeowners. These include geographic regions and financial situations offered by federal government agencies such as Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). The U.S. homeownership rate (homes filled with occupant-owners) reached 65 percent by 1975 before hitting a record 69 percent by 2005, but fell back to 65 percent by 2019 according to the St. Louis Federal Reserve Bank’s Economic Research Division.
- Consumer demand for mortgages does not affect interest rates as much as the supply of investor capital, risk-taking, and financial market liquidity on Wall Street. Thousands of institutional investors are looking for low-risk financial assets, as well as something they can easily sell when needed. This investment in mortgage bonds are sold on what is called the “secondary mortgage market” and is just one type of bond bought and sold every day by investors. They have a dollar value which rises or falls daily. While some mortgage-bond investors are long-term holders, others just need a safe asset they can hold onto in the short run before selling and parking their money elsewhere.
Consider this: In July, more than 90 percent of “equity rich” homeowners/borrowers had a current mortgage with an interest rate above current rates and are refinance candidates, according to mortgage data firm Black Knight.
Contact your credit union for guidance. It consistently reviews mortgage rates and can provide the right direction. Credit unions are committed to financial education so you can achieve your financial goals. Check out all of their homebuyer resources available and learn what you can before you decide to refinance or buy a home. Or, give them a call and have them walk you through your financial situation and see what is possible.