Understanding the Impact of Coronavirus on Mortgage Rates (3/25/20)
You may have heard that “the Fed lowered mortgage rates to zero”, or that “mortgage rates are at 50 year lows.”
Mortgage rates are not zero, and they are actually much higher than they were three weeks ago. Why? What’s going on? Will mortgage rates go down again so you can refinance?
I believe that we will see historically low mortgage rates again soon. At the end of this article I will suggest a game plan for refinancing.
First, let’s talk about how mortgage rates are set, why they are so high right now, and what is likely to happen going forward. How Mortgage Rates Are Determined:
Mortgage rates are not determined by the Fed Funds Rate. Mortgage rates are determined by the yield on mortgage bonds and by the bank’s profit margin. Click here to view a graph that shows the disconnect between the Fed funds rate and mortgage rates.
The source of money for home mortgages originates from investors who purchase mortgage bonds. Mortgage bonds are bought and sold in the billion dollar bond market, and prices get adjusted continually during the day based on supply and demand. As the prices of mortgage bonds change during the day, it directly affects mortgage rates.
If many investors want to buy bonds, the price goes up and the yield goes down. The yield is the number that determines the rate you pay on a mortgage. So, the lower the yield is on mortgage bonds, the lower interest rate you get on your new mortgage.
How This Has Recently Played Out:
Recently, supply and demand for mortgage bonds have been thrown out of orbit by the bond investors’ response to the economy being shut down by the government. Bond investors stopped buying mortgage bonds, which caused mortgage rates to skyrocket.
Mortgage rates are also affected by banks and mortgage companies adding a profit margin to the rates established in the bond market. When the banks became overwhelmed with new loan applications 3 weeks ago, they raised their profit margin in order to slow down the number of new mortgage applications. This caused mortgage rates to go up even further.
In order to ‘calm’ the mortgage bond market, the federal government stepped in and is currently buying an unprecedented $50 billion in mortgage bonds every day, and have committed to spend what it takes to keep the bond market functioning.
I believe we will see very low mortgage rates again.
In the near term, the fed will keep buying bonds, and the banks will close the huge number of refinance applications in the pipeline. No one knows the future, but I believe that mortgage rates will be very volatile for now, and then trend lower after a few weeks. Don't Miss the Boat!
If you feel like you missed the boat on refinancing when rates were low three weeks ago, I think you’ll get another chance at it. If your current rate is above 4.5%, I advise you to get the refinance process started. Don’t lock interest rate at application, and then monitor the situation as your mortgage is processed.
When the rates come down as I think they will, you will be positioned to lock in a low rate and close on the mortgage quickly. If you wait until rates come down again before you apply, you may miss the boat again.
I have been a mortgage lender since 1992, and I have experience with all types of mortgage loans. If you are in Michigan, I can help you through every step of this process and supply the resources and expertise you need to make the most of the coming opportunity. Feel free to contact me with any questions, or apply securely online at homesandloans.info.