For the past few years, we’ve benefitted from historically low mortgage interest rates. When the Federal Reserve lowered the interest rate on March 15th, some people thought that the mortgage rates would take yet another dive as well.
While they initially did, it had nothing to do with the Federal Reserve lowering their rate. The Fed’s rate generally affects things like the rate you would pay for an auto loan or credit card while mortgage rates are primarily a reflection of the 10-Year Treasury Bond rate. When it goes up, mortgage rates decrease, and vice-versa.
None of that, however, explains the past week that has seen mortgage rates swing wildly up and down. The best explanation we have come across comes to us from Realtor.com and goes a little something like this:
Why mortgage interest rates are on a roller-coaster ride
Typically when the economy is struggling, mortgage rates fall. But there’s nothing typical about this period. And there are several financial reasons that rates are seesawing so wildly.
First, it’s a reaction by lenders to the overwhelming throngs of homeowners who have been looking to refinance their mortgages when the rates bottomed out earlier this month. The gold rush was understandable: Some homeowners were able to save themselves hundreds of dollars a month and tens of thousands of dollars over the duration of their 30-year loans after refinancing at lower rates. But the hordes of people looking to lock in such deals turned out to be more than some lenders could handle. Many hiked up their rates to slow down the process,
But the bigger driver of the volatility involves mortgage-backed securities in the secondary market. After lenders make a mortgage, they typically don’t want to hold on to it because it ties up money they could be using to make new loans. So they sell the mortgage loans, which are bundled into a collection of mortgage-backed securities (aka mortgage bonds), to investors in the secondary market.
Still with us? Investors view mortgage -backed securities similarly to U.S. Treasury bonds. They’re both typically safer, less lucrative investments than the stock market. So with the stock market hurting, investors have traditionally turned to bonds. But now there is a glut of bonds on the market, thanks to the deluge of refis and the federal government issuing more bonds to fund economic stimulus measures. So bond prices are low.
And since mortgage rates are the inverse of bond prices, when bond prices are down, mortgage rates go up.
“The mortgage market is in absolute CHAOS!” Graham wrote in a recent article. “Coronavirus has created an unprecedented situation for the entire rates market (not just mortgages, but U.S. Treasuries and everything else).”
Now, the Fed has pledged to buy up at least $500 billion in U.S. Treasury bonds and $200 billion in government mortgage-backed securities over the coming months. That’s very likely to stabilize mortgage-backed securities as the demand is expected to bring mortgage rates down again.
But the problem is that many skittish investors want to keep their money more liquid during an unprecedented health and economic crisis—instead of locking up their cash for multiple years.
So as the stock market seems to be changing by the minute, so are mortgage interest rates.
“People want flexibility right now because things are different today than they were a couple of weeks ago,” says Hale. “When you don’t know what’s going to happen, holding cash gives you flexibility.”
What mortgage rate fluctuations mean for buyers
Longtime mortgage lender Don Frommeyer is advising his clients to apply for a refinance or purchase loan and get their paperwork in now. That way once rates fall again, they’re ready to lock in a low rate. Rates at his company, CIBM Mortgage, in Indianapolis, were at 5.5% as of Friday.
“The rates should really be down somewhere in the low 3% [range], and they’re in the 5% range,” says Frommeyer. “I’ve been in the mortgage business 45 years, and this is the first time I’ve seen it crazy like this.”
But buyers and homeowners should also realize the chaos is unfolding in real time.
“Be prepared to be a little bit flexible because things are moving so quickly now,” says Hale. “It could be days, it could be weeks, it could be months before it makes sense for you to refinance.”
And folks shouldn’t forget about the fees involved in a refinance. They average about $4,345 nationally, depending on the size of the loan and the lender, according to ValuePenguin, a consumer spending information website.
When things will calm down and stabilize is anyone’s guess.
“The rates should really be down somewhere in the low 3% [range],” says Frommeyer.
“While we can logically conclude that a massive economic recession should coincide with very low rates, there’s too much uncertainty,”
Stay tuned. As we hear more we’ll update you! In the meantime, stay healthy and be kind to one another!
Clare Trapasso is the senior news editor of realtor.com and an adjunct journalism professor at St. John’s University. She previously wrote for a Financial Times publication, the New York Daily News, and the Associated Press. She is also a licensed real estate agent with R New York.