Mortgage Rates

Apache is functioning normally

Well, it’s been over a week since the Fed cut rates and mortgage rates went up.

While this may have come as a surprise to some, seasoned mortgage industry peeps didn’t bat an eye.

It’s pretty common for the Fed to do one thing and mortgage rates to do another.

Without getting too convoluted, the Fed adjusts short-term rates while mortgages are long-term rates, aka the 30-year fixed.

In other words, the cut (and future cuts too) were already priced in to mortgage rates. So much so that they actually increased over the past week in a sort of “sell the news” correction.

Are Mortgage Rates Still Dropping?

Fitch Ratings recently came out and said the 50-basis point Fed rate cut was already priced in to both the 10-year Treasury yield and 30-year fixed mortgage rates.

In addition, they argued that the 10-year yield, which tracks mortgage rates historically, has “less room to decline” because of that.

It basically already came down in anticipation and might be difficult to drop much lower. In fact, we’ve seen it rise since the Fed cut last week.

The 10-year yield was as low as 3.61% and now sits around 3.77%, putting some mild upward pressure on mortgage rates since then.

Rates actually looked destined for the high-5% range before pulling back and inching their way back toward 6.25%.

And with little economic data out this week, there’s been no reason for them to rally.

But next week we get the employment report, which could help rates resume their downward path if it comes in soft.

Maybe Low 5% Mortgage Rates By 2026

If the 10-year yield isn’t expected to get much better from here, mortgage rates will only be able to move lower with better spreads.

Currently, mortgage spreads are wide because of high prepayment risk, volatility, and general uncertainty.

Investors demand a premium to buy mortgage-backed securities (MBS) versus government bonds and recently they’ve asked for a lot more than usual.

Fitch puts the typical spread at about 1.80%, while I’ve long said it’s about 170 basis points. Either way, it’s markedly higher today.

It was nearly 300 bps at its worst in 2022. It has since shrunk to about 240 basis points, meaning it’s about halfway back to normal.

So if bond yields do indeed stay sticky where they’re at, you’ll need some spread normalization to get mortgage rates to move lower.

It’s certainly possible, and as I wrote a couple weeks ago, could result in mortgage rates falling about .50% from current levels.

That would put the 30-year fixed in the high-5% range, and even lower if a borrower is willing to pay discount points.

Mortgage Rates Unlikely to Fall Below 5% Before 2027

The rating agency also proclaimed that mortgage rates are unlikely to fall below the big 5% threshold before the year 2027.

That means at least another two years of “high rates” before mortgage rates are no longer a concern.

Again, that’s because the 10-year yield is expected to stay mostly level and only drop to around 3.50% by the end of 2026.

If the spreads are back to mostly normal by then, you can do the math and come up with a rate of around 5.30% (3.5+1.8).

Of course, this is all just a forecast and many of these forecasts have been wrong in the past. In fact, they’re rarely right. Most were wrong on the way down to 3% and the way up to 8%!

So who is to say they’ll be right this time around either?

I’m a bit more optimistic on mortgage rates because I think there are a lot of Fed rate cuts projected over the next 12 months, which haven’t all been baked in.

Similar to the ride up for mortgage rates, from sub-3% to 8%, the market was caught off-guard. This could happen on the way down too.

I can envision a 10-year yield dropping to the lower 3% range next year, when combined with some spread compression puts the 30-year fixed in the mid-5% range potentially.

And once you factor in points, lots of rate quotes in the high 4% range. For most home buyers, that would be acceptable.

But I’ve long argued rates are no longer the main sticking point. We’ve got home prices that are perhaps too expensive in many markets, along with sticker shock on insurance, taxes, and everyday goods.

Without a little home price easing, it’ll still be a tough sell for those looking to buy into the market, especially if the wider economy deteriorates.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

I know, I know, mortgage shopping is the worst. It’s not a fun thing to do.

It’s not like shopping for a new car or a new TV, or even a new house. But it’s a necessary evil unless you’ve got a boatload of cash.

The reason it’s not fun is because there’s lot of math, paperwork, and high-pressure salespeople involved.

Not to mention lots of mortgage lingo that will likely go over your head.

But there’s a silver lining to putting in all that time to shop; you’ll learn a lot about mortgages.

I Get It, Mortgages Aren’t Fun

Look, I’ll be the first person to tell you that mortgages are boring af. I’ve been writing about them for nearly 20 years now.

And before that, I was working on the frontlines with mortgage brokers and loan processors and underwriters.

None of it was fun, and it’s probably even less fun when you’re new to it and simply trying to get through it.

Conversely, you might have a blast shopping for a new car and doing test drives while checking out all the cool features.

The same goes for new clothes, a new TV, computer, etc. They call it retail therapy for a reason.

I’ve never heard anyone say mortgage shopping is therapeutic. In fact, it’s usually the exact opposite.

Typically, people say they’d rather go to the dentist than go through the mortgage process.

Okay, so what’s the point here? Well, as mentioned, you can learn a lot if you do shop around.

Learn About Mortgages as You Shop Your Rate

Most people don’t shop around for their home loan. They either just go with the lender their real estate recommended, or the first quote they come across.

Again, this is because mortgages are not at all fun. And not getting any funner.

Not only does this cost people (since studies prove multiple quotes leads to lower rates), it also means you won’t learn a whole lot.

Again, I understand. Most people are literally just trying to get through it so they can move into their new home. Or enjoy a new low rate on their existing mortgage in the case of a refinance.

But aside from potentially paying more, you’ll also learn less. And when you know less about something, the probability of a bad decision increases.

For example, you might pick the wrong mortgage product for your individual situation.

Or you might be told to pay discount points at closing, only to sell your home or refinance before the breakeven period.

You might even refinance even when it doesn’t make sense to do so. Or buy too much house and become house poor because the numbers were only presented to you one way.

Bringing it full circle, you might also get ripped off because you’ll be a novice and more easily taken advantage of.

If you actually make a few phone calls and speak to multiple loan officers, mortgage brokers, etc., you’ll learn more about the ins and outs of it all.

Each time you talk to someone new you’ll have a little bit more knowledge than the prior call.

And this will help you avoid the typical gotchas and perhaps allow you to come off more confident. That can lead to better mortgage rate negotiating and ultimately better odds of a lower rate.

Here Are Some Mortgage Shopping Tips to Make It Less Awful

If you’re stressed about it your credit scores, keep in mind that while mortgage inquiries can lower your credit score, it’s often not by much.

You also don’t need to let everyone run your credit. And FICO now combines multiple mortgage inquiries into one when made within a 14- to 45-day window.

Those who have heard of those annoying trigger leads can employ a strategy I laid out years ago.

Use a temporary phone number like Google Voice for free. Share that number with all the lenders, brokers, etc.

Then ditch it once you’ve found your match and carry on with your real number. Or just keep using the temporary one!

Even if you use a mortgage broker, take the time to compare mortgage brokers too. Because many of them just send all their business to one lender. So it’s not really shopping around.

In addition, they have varying compensation structures, meaning if you compare more than one you might land on the broker who earns less per loan and saves you money.

For example, one broker might earn 2% on each loan, while another is satisfied with just 1% loan origination fee in exchange for more volume. The broker earning less will likely have the lower rate and closing costs.

Lastly, if you already have average or poor credit, know that mortgage rates can vary even more, so shopping around is even more important!

Simply put, rates are priced in a tighter range for those with really high FICO scores. But even those folks should also gather more than one quote!

Read on: How to shop for a mortgage.

(photo: Alan Levine)

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

I know, I know, mortgage shopping is the worst. It’s not a fun thing to do.

It’s not like shopping for a new car or a new TV, or even a new house. But it’s a necessary evil unless you’ve got a boatload of cash.

The reason it’s not fun is because there’s lot of math, paperwork, and high-pressure salespeople involved.

Not to mention lots of mortgage lingo that will likely go over your head.

But there’s a silver lining to putting in all that time to shop; you’ll learn a lot about mortgages.

I Get It, Mortgages Aren’t Fun

Look, I’ll be the first person to tell you that mortgages are boring af. I’ve been writing about them for nearly 20 years now.

And before that, I was working on the frontlines with mortgage brokers and loan processors and underwriters.

None of it was fun, and it’s probably even less fun when you’re new to it and simply trying to get through it.

Conversely, you might have a blast shopping for a new car and doing test drives while checking out all the cool features.

The same goes for new clothes, a new TV, computer, etc. They call it retail therapy for a reason.

I’ve never heard anyone say mortgage shopping is therapeutic. In fact, it’s usually the exact opposite.

Typically, people say they’d rather go to the dentist than go through the mortgage process.

Okay, so what’s the point here? Well, as mentioned, you can learn a lot if you do shop around.

Learn About Mortgages as You Shop Your Rate

Most people don’t shop around for their home loan. They either just go with the lender their real estate recommended, or the first quote they come across.

Again, this is because mortgages are not at all fun. And not getting any funner.

Not only does this cost people (since studies prove multiple quotes leads to lower rates), it also means you won’t learn a whole lot.

Again, I understand. Most people are literally just trying to get through it so they can move into their new home. Or enjoy a new low rate on their existing mortgage in the case of a refinance.

But aside from potentially paying more, you’ll also learn less. And when you know less about something, the probability of a bad decision increases.

For example, you might pick the wrong mortgage product for your individual situation.

Or you might be told to pay discount points at closing, only to sell your home or refinance before the breakeven period.

You might even refinance even when it doesn’t make sense to do so. Or buy too much house and become house poor because the numbers were only presented to you one way.

Bringing it full circle, you might also get ripped off because you’ll be a novice and more easily taken advantage of.

If you actually make a few phone calls and speak to multiple loan officers, mortgage brokers, etc., you’ll learn more about the ins and outs of it all.

Each time you talk to someone new you’ll have a little bit more knowledge than the prior call.

And this will help you avoid the typical gotchas and perhaps allow you to come off more confident. That can lead to better mortgage rate negotiating and ultimately better odds of a lower rate.

Here Are Some Mortgage Shopping Tips to Make It Less Awful

If you’re stressed about it your credit scores, keep in mind that while mortgage inquiries can lower your credit score, it’s often not by much.

You also don’t need to let everyone run your credit. And FICO now combines multiple mortgage inquiries into one when made within a 14- to 45-day window.

Those who have heard of those annoying trigger leads can employ a strategy I laid out years ago.

Use a temporary phone number like Google Voice for free. Share that number with all the lenders, brokers, etc.

Then ditch it once you’ve found your match and carry on with your real number. Or just keep using the temporary one!

Even if you use a mortgage broker, take the time to compare mortgage brokers too. Because many of them just send all their business to one lender. So it’s not really shopping around.

In addition, they have varying compensation structures, meaning if you compare more than one you might land on the broker who earns less per loan and saves you money.

For example, one broker might earn 2% on each loan, while another is satisfied with just 1% loan origination fee in exchange for more volume. The broker earning less will likely have the lower rate and closing costs.

Lastly, if you already have average or poor credit, know that mortgage rates can vary even more, so shopping around is even more important!

Simply put, rates are priced in a tighter range for those with really high FICO scores. But even those folks should also gather more than one quote!

Read on: How to shop for a mortgage.

(photo: Alan Levine)

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

While lower mortgage rates have reinvigorated hope for the stalling housing market, 2025 might not wind up much better than 2024.

Sure, lower interest rates boost affordability, but there are other components to a home purchase that remain cost-prohibitive.

Whether it’s simply an asking price that’s out of reach, or rising insurance premiums and lofty property taxes. Or other monthly bills that eat away at the housing budget.

This explains why mortgage origination forecasts for purchase lending continue to be pretty dismal.

However, the emerging trend of rising mortgage refinance volume should get stronger into 2025.

2024 Purchase Volume Has Been Revised Down

A new report from iEmergent revealed that 2024 purchase mortgage originations are projected to fall in terms of loan count when compared to 2023.

In other words, despite lower mortgage rates, the number of home purchase loans is now expected to fall below 2023 levels.

However, thanks to an increase in average loan size, the company believes purchase loan volume will still see a modest increase of 3.5% year-over-year.

To blame is still-high mortgage rates, which peaked about a year ago and have since fallen nearly two percentage points.

But home prices remain elevated, and when combined with a 6% mortgage rate and steep insurance premiums and rising property taxes, the math often doesn’t pencil.

Adding to affordability woes is the continued lack of existing home supply. There simply aren’t enough homes for sale, which has kept prices high in spite of reduced demand.

Refis Expected to Jump Nearly 50% from 2023 Lows

On the other side of the coin, mortgage refinances are finally showing strength thanks to that pronounced decline in mortgage rates.

They bottomed in late 2024 when the 30-year fixed hit the 8% mark, with only a handful of cash out refinances making sense for those in need of payment relief (on other debt).

But since then rate and term refinances have picked up tremendously as recent vintages of mortgages have fallen “into the money” for monthly payment savings.

As noted a week ago, rate and term refis surged 300% in August from a year earlier and the refinance share of total loan production rose to 26%, the highest figure since early 2022.

Chances are it will continue to grow into 2025 as mortgage rates are expected to ease further this year and next.

iEmergent said they “expect rates to finally start declining in the months ahead,” on top of the near-2% decline we’ve already seen.

While many have argued that the rate cuts are mostly baked into mortgage rates already, which explained mortgage rates rising after the Fed cut, there’s still a lot of economic uncertainty ahead.

The 50-basis point came as a surprise to many and another one could be on deck for November, currently holding a 60% probability per CME FedWatch.

If it turns out the Fed has gotten behind the eight ball, 10-year bond yields (which track mortgage rates) could drop more than is already penciled in.

At the same time, there’s still room for mortgage spreads to compress as the market normalizes and adjusts to the new lower rates (and higher loan volumes ahead).

2025 Refinance Volume Slated to Rise Another 38%

Looking forward to 2025, the refinance picture is expected to get even brighter, with such loans rising a further 38% (in dollar amount) from 2024.

This will likely continue to be driven by rate and term refis as interest rates continue to improve and the millions who took out loans since 2022 take advantage of cheaper rates.

But it could also come in the form of cash out refinances, which will become more attractive as well.

Even if an existing homeowner has a rate of say 4%, something in the high-5s or low 6% range could work if they need cash.

This could be a reflection of increasing debts in other departments, as pandemic-era savings run dry.

Ultimately, homeowners have barely touched their equity this housing cycle, so there’s an expectation that it’ll happen at some point, especially with home equity at record highs.

You might also see this in the form of second mortgage lending, with HELOC rates expected to fall another 2% as the prime rate is lowered by that same amount over the next 12 months.

Meanwhile, iEmergent is forecasting a paltry 6.5% increase in purchase volume in 2025, pushing overall dollar volume growth to just 13.3%

As for why purchase lending is projected to be relatively flat next year, it’s a wider economy story.

If economic growth continues to decelerate and a recession takes place, a weaker labor market with higher unemployment could dampen home buyer demand.

So even if mortgage rates decline more as a result, you’ve got fewer willing and able buyers, despite lower monthly payments.

This explains the phenomenon of how home prices and mortgage rates can fall in tandem.

They might not, but it at least debunks the idea of there being an inverse relationship between the two.

Long story short, 2025 should be better for mortgage originators thanks to refis, but don’t get your hopes up on purchase lending seeing a big jump thanks to lower rates.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Want to lower your mortgage rate without a traditional refinance? Look into a “mortgage rate modification,” which does just that.

Instead of having to contact lenders, fill out applications, and provide stacks of paperwork, you might be able to get payment relief by simply signing a modification agreement.

Aside from it being easier than a refinance, it could cut the processing time down from a month plus to just a week or so.

That means if you start the process early in the month, your very next mortgage payment could be lower.

While that all sounds great, there are some limitations you should be aware of, and like a refinance, fees are typically charged as well.

How a Mortgage Rate Modification Works

As the name suggests, a mortgage rate modification allows you to lower the interest rate on your existing home loan without going through the formal refinance process.

Instead, you are simply asked to fill out a modification agreement with your current loan information, including mortgage rate and loan product, along with desired loan program and current interest rate.

For example, if you currently hold a 30-year fixed-rate mortgage set at 7%, you’d enter that into the form and then select the type of loan you’d like going forward.

This could be another 30-year fixed, or perhaps a 15-year fixed or even an adjustable-rate mortgage if permitted.

Or it’s possible you hold an ARM loan and want to move into a fixed-rate product at the same time, removing future rate adjustment risk and snagging a lower rate in one move.

Typically, the lending institution would use the current advertised mortgage rate as the new interest loan on the loan.

So if credit union X is offering a rate of 5.875% on their rate sheet that day, you could obtain a rate more than a full percentage point lower using our example from above.

The loan would then be re-amortized using the new mortgage rate and remaining loan term to determine monthly payments.

While that would result in some nice monthly savings, and reduce your total interest expense, there is typically a fee.

How Much Does a Mortgage Rate Modification Cost?

As noted, this type of transaction isn’t free of charge. You will need to pay a fee, just as you would for a refinance.

The banks aren’t doing it out of the kindness of their hearts. So expect either a flat fee, such as $999, or a percentage fee based on the loan amount.

For example, you might be charged anywhere from 0.5% to 1% of the outstanding loan balance in exchange for the modification.

Doing the math, a $500,000 modification could cost anywhere from $2,500 to $5,000 to process.

That’s not a small number for many households and could in fact be cost-prohibitive, especially if you’re seeking payment relief.

However, there are sometimes caps on the fee that can be charged, so even if they charge a percentage, it might top out at say $2,000.

Conversely, there could have a minimum fee as well, so even if you have a small loan amount, you might be charged the minimum dollar amount.

Another consideration is closing costs typically can’t be rolled into the loan amount. So you’ll need to come up with the funds out-of-pocket to get the deal done.

Which Lenders Allow Mortgage Rate Modifications?

From what I’ve seen, mortgage rate modifications are most commonly offered by local credit unions and sometimes larger depository banks.

Both of these types of lending institutions hold mortgages in their own portfolios (as opposed to selling them off), which gives them more control over the process.

As such, these types of offers are less common with direct-to-consumer mortgage lenders and nonbank lenders, which often sell the loans they originate shortly after closing.

In other words, you might have better luck getting approved for this type of thing with a credit union or bank. But it doesn’t hurt to ask regardless.

Try reaching out to the loan servicer if the mortgage was sold, as the originator likely won’t be able to extend an offer.

Chances are they’ll try to guide you toward a mortgage refinance if they can’t or don’t offer a mortgage rate modification.

Mortgage Rate Modification vs. Mortgage Refinance

While both a rate modification and a mortgage refinance, namely a rate and term refinance, result in a lower interest rate, there are key differences.

Perhaps the biggest is that a traditional refinance tends to take a lot longer and is much more involved.

It includes a full-on loan application, verification of income, assets, and employment, a credit pull, and possibly a home appraisal as well.

Conversely, a rate modification might be as easy as filling out a form while skipping the document collection and appraisal.

In addition, you won’t have to worry about all the closing costs associated with a refinance, including title and escrow fees, lender fees (other than the modification fee), and so on.

However, a rate modification isn’t available on all types of loans, and may be limited to owner-occupied homes only.

There’s also a good chance you’ll only be able to qualify for one rate modification per year, and you might need to make a minimum number of payments before you’re eligible.

You’ll also need money to complete the modification, whereas it’s possible to apply for a no cost refinance where no money is required out-of-pocket.

Another limitation with rate modifications is you can’t pay discount points to get an even lower rate.

So you’ll just be able to get the market rate and nothing better, assuming you wanted to buy down your rate.

And lastly, a traditional refinance may allow you to skip a payment (or two), which can be beneficial to those who need some major payment relief.

Mortgage Rate Modification Pros and Cons

The Pros

  • You can lower your rate without refinancing
  • Obtain a cheaper monthly payment with the same loan term
  • Doesn’t reset the clock so you’ll stay on track paying down the loan
  • May be able to switch loan programs (ARM to fixed-rate loan)
  • Doesn’t require an appraisal or formal loan application
  • Process is typically very fast and relatively easy (2 weeks or less)
  • No closing costs other than the modification fee (which varies by bank/lender)

The Cons

  • You must pay a fee for the modification (either flat fee or % fee)
  • Can’t roll the fee into the loan amount (must pay out-of-pocket)
  • Rate improvement limited to market rate at time of application
  • May be limited to owner-occupied properties only
  • Might be limited to one modification annually
  • May require a minimum number of monthly payments before you’re eligible
  • No cash out allowed

Keep reading: How to lower your mortgage rate without refinancing.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Anyone who works in the industry probably saw this coming. But those who don’t might be left scratching their head.

Yesterday, the Fed finally pivoted and cut its own fed funds rate, yet mortgage rates went up. Why does this always seem to happen?

Shouldn’t good news on the interest rate front push rates lower across the board? Seems perfectly logical until you dig into the details.

There are two main reasons why mortgage rates often defy the Fed’s own move.

One is that the Fed’s policy is often fairly telegraphed and not a surprise, and the other is that the data is typically baked in already.

The Fed Simply Follows the Economic Data

First things first, the Federal Reserve is simply making monetary policy decisions (hike, cut, nothing) based on the economic data in front of them.

So their FOMC statement and accompanying interest rate decision generally don’t come as much of a surprise.

Yesterday, there was a little more uncertainty than normal, with both a 25-basis point and 50-basis point cut a possibility.

The Fed opted to go with a 50-bps cut, which had been the favorite with a ~60%+ likelihood per CME FedWatch.

In other words, the Fed did what the market expected, as they often do. The reason the Fed does what the market expects is because they base their decisions on publicly available data.

And the data is somewhat old by the time the Fed makes its announcement. That removes much of the element of surprise.

However, what can move the bond market after the FOMC interest rate decision is the press conference with the Federal Reserve chairman Jerome Powell.

He explained that they took the step of making a 50-bps cut because they had patiently waited for inflation to come down, and were now comfortable to make a “strong move.”

The bigger cut allows them to (hopefully) avoid a big increase in unemployment while also preventing a return to high inflation.

But he added that there shouldn’t be an expectation that 50-bps cuts are the new normal. The decisions will still be made meeting-by-meeting.

So no real surprises here and not enough new information for mortgage rates to continue falling.

Mortgage Lenders Have Already Dropped Rates a Ton Leading Up to the Fed Rate Decision

The other relevant piece here is that mortgage lenders were already aggressively lowering mortgage rates heading into the Fed meeting.

If you look at the 30-year fixed, it had already fallen nearly 150 basis points (1.50%) since the end of April.

In other words, bonds and mortgage-backed securities (MBS) were making big moves based on the data and the expected Fed pivot for months now.

A lot of the price improvement, if not nearly all, was priced in before Fed day. It’s kind of a “sell the news” situation.

You know something is coming so you buy bonds or MBS and once the news actually hits, it could be time to sell off a bit.

In this case, it’s just an expected bounce in the opposite direction as everyone digests the widely-anticipated Fed decision.

To put it another way, mortgage lenders tend to price their rates defensively ahead of an FOMC interest rate decision, so often times there’s a bit of a relief rally after a hike.

Just keep in mind this is but one day, and mortgage rates may develop a longer-term trajectory based on what’s going on with the Fed and underlying economic data.

But the best way to track mortgage rates is by watching the 10-year bond yield and/or MBS prices.

Since yesterday, the 10-year yield has already ticked up about 10 basis points and MBS prices have fallen a bit.

No major movement, but perhaps a disappointment for those who thought mortgage rates would fall further after the Fed cut rates.

Mortgage Rates Tend to Defy the Fed

September 18th, 2024: Rate cut, mortgage rates up
July 26th, 2023: Rate hike, mortgage rates down
May 3rd, 2023: Rate hike, mortgage rates down
March 22nd, 2023: Rate hike, mortgage rates down
February 1st, 2023: Rate hike, mortgage rates down
December 14th, 2022: Rate hike, mortgage rates down
November 2nd, 2022: Rate hike, mortgage rates UP
September 21st, 2022: Rate hike, mortgage rates down
July 27th, 2022: Rate hike, mortgage rates down
June 15th, 2022: Rate hike, mortgage rates down
May 4th, 2022: Rate hike, mortgage rates down
March 16th, 2022: Rate hike, mortgage rates UP

I was curious what tends to happen with mortgage rates on Fed decision day so I looked at the past 12 decisions and used MND data for mortgage rate movement on the days in question.

I included the 11 rate hikes since March 2022 and the pivot to a cut yesterday. Unsurprisingly, as far as I’m concerned, mortgage rates tend to defy the Fed more often than not.

In other words, when the Fed raises rates, mortgage rates often fall. And when the Fed cuts, mortgage rates tend go up.

I’ll need more data on the latter piece as they continue to make expected cuts. But it wouldn’t surprise me to see this trend continue.

Just note that the mortgage rate movement post-Fed rate decision often isn’t significant. And over time, things can change a lot more.

For example, even though lenders often cut rates on Fed hike day, the longer-term direction of mortgage rates was decidedly higher.

Now we might see the opposite. As the Fed is expected to make additional cuts, lenders may gradually lower rates over time.

But again, it’s not because of the Fed! It’s the underlying data and direction of the economy.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

After sustaining a 23-year high for over a year, the Federal Reserve has elected to slash the federal funds target rate by half a point, dropping from a range of 5.25%-5.50% to 4.75%-5%.

Lenders anticipated that the Fed would move to lower rates by some degree, and began adjusting mortgage rate offers ahead of the September 17-18 meeting: Rates fell 23 basis points in the week ending September 12. (A basis point is one one-hundredth of a percentage point.) This means that home shoppers who still find today’s rates out of budget shouldn’t expect more than modest drops in the coming days.

Why the Fed is moving quickly now

The Fed has held rates steady for the past 14 months in an effort to control inflation. Recent data shows that the economy is moving toward central bankers’ target inflation rate of 2% — the latest Consumer Price Index (CPI) report, a broad measure of price changes for goods and services in the U.S., shows that inflation slowed to 2.5% in August, down from 2.9% in July and 3% in June.

This data alone may have justified a softer cut of 25 basis points to keep inflation on a downward trajectory. However, job growth continued to slow in August, and a fairly weak July jobs report showed the rate of unemployment hitting a three-year high. Unemployment is a leading sign of recession, and the Fed’s decision to reduce rates by 50 basis points indicates that employment may have now eclipsed inflation as the Fed’s chief concern for the economy.

While this is good news for mortgage shoppers hoping to score a lower interest rate, the Fed’s aggressive move may reflect an effort to hold off “more rapidly deteriorating labor market conditions and weakening of the economy,” said Selma Hepp, chief economist and senior vice president at the housing data provider CoreLogic.

Lawrence Yun, chief economist at the National Association of Realtors (NAR), said that the Fed’s choice could be the result of both positive and negative factors. If an unsteady job market is the Fed’s primary motivation, it could mean that central bankers see the possibility of a recession. On the other hand, it could be a good sign “if the Fed has a solid belief that inflation is conquered, even as CPI remains at 2.5%.”

Mortgage rates have further room to fall (but home prices will rise)

Falling interest rates are likely to signal changes across the housing market. Freddie Mac’s August 2024 Outlook projects that the labor market will continue to weaken into 2025. In this scenario, Freddie Mac outlines the probability that mortgage rates will trend downward in the coming months, leading to a “significant surge in demand, mainly from the first-time home buyers left at the margins,” as well as a small uptick in housing inventory as the rate lock-in effect loosens somewhat.

With an influx of buyers and inventory remaining tight, home prices are expected to rise 2.1% in 2024 and 0.6% in 2025. Fannie Mae’s August economic development report projects that mortgage rates will average 6% in 2025.

While Fed watchers are mostly inclined to believe that another cut will come at the November 6-7 meeting, any decision by central bankers will be informed by trends in new economic data as it emerges. One CPI report and two jobs reports will be released between now and then, and what they reveal about the rates of inflation, unemployment and job growth will be a major indicator of when and how the Fed may choose to shift rates.

How home buyers can move forward

Market traders were divided over predictions of what central bankers would do in the days leading up to this September meeting. Those currently shopping for a mortgage should remember that mortgage rates will continue responding to expectations of what the Fed will do, rather than waiting for central bankers to take action. If additional rate cuts are expected, we could see mortgage rates fall even further before the November meeting.

There’s no perfect way to time the market, and buyers holding out for mortgage rates to hit their lowest point will have to contend with greater competition and higher home prices. While it’s understandable to want to get the best deal, the “right time to buy” is determined by personal factors as much as economic ones.

If you can afford to move forward with your homebuying plans now and want to take advantage of refinancing later, you can benefit from strategically keeping your closing costs as low as possible, since you’ll have to pay them again when refinancing. For example, if you’re hoping to refinance in the next year or so, it wouldn’t make sense to pay for points that lower your mortgage rate at closing right now.

However, while it can be useful to think about your refinancing plans when considering your closing options, it’s not recommended that you commit to a mortgage you cannot comfortably afford with an expectation that you’ll refinance later. The lack of consensus among industry experts going into this meeting should underscore the fact that it’s too risky to rely on a concrete timeline of when rates will hit your specific target.

Source: nerdwallet.com

Apache is functioning normally

If you’ve got a home equity line of credit (HELOC), payment relief may finally be here.

The Fed is expected to “pivot” today, meaning they’ll shift from a tightening monetary policy to a loosening policy.

In other words, they’re going to start cutting rates instead of raising them!

While this won’t have a direct impact on long-term mortgage rates, it directly affects loans tied to the prime rate, including HELOCs.

This means your HELOC rate will go down by whatever the Fed cuts. So if they cut 25 basis points today, your HELOC rate will be adjusted down 0.25%.

Though one cut isn’t likely to provide major relief, there are expectations that this is the first cut of many, with possibly 200+ bps of cuts penciled in over the next 12 months.

So if you’ve been given the option to “lock your HELOC rate,” it’s probably best to give it a hard pass.

How HELOC Rates Are Determined

As a quick refresher, HELOCs are variable-rate loans, meaning they can adjust each month based on the prime rate.

To come with your HELOC rate, you combine the HELOC’s margin, which is fixed, and the prevailing prime rate, which moves in lockstep with the fed funds rate.

Whenever the Fed decides to raise or lower its own fed funds rate (FFF), the prime rate will also go up or down by the same amount.

Since early 2022, the Fed has raised the FFF 11 times, from near-zero to a range of 5.25% to 5.50%.

Today, they are expected to lower the FFF either 25 or 50 bps. This means banks will lower the prime rate by the same amount shortly after.

Quick note: The Fed does not control long-term mortgage rates, so their action today won’t directly impact the 30-year fixed. If they cut the 30-year fixed could actually rise today!

Anyway, let’s assume you have a margin of 2% and prime is currently 8.50%. That’s a 10.50% HELOC rate. Ouch!

But if the Fed cuts 25 bps or 50 bps today, that rate will fall to 10.25% or 10%. Okay, we’re getting somewhere.

Still not a low rate, though it’s finally not going up and in fact is coming down.

Now factor in another 200 bps of cuts and the rate is down to 8%. Sweet, that could actually result in some decent interest savings and a lower monthly payment!

What Is Locking Your HELOC Anyway?

That brings us to “locking your HELOC.” As noted, HELOCs are variable-rate loans.

But the banks will sometimes give you the opportunity to lock the interest rate in for the remainder of the loan term. This happened to my friend, who asked today if he should lock in his rate.

This only happens once you’ve had the HELOC open for a period of time and made draws on it. Not upfront, otherwise that’d simply be a fixed-rate home equity loan.

So Bank X might say hey, we know rates have been rising and there’s a lot of uncertainty out there.

If you don’t want to deal with any further adjustments, you can lock in the rate you currently have.

For those not paying attention to the Fed, this might sound like a decent idea. After all, many homeowners are risk-averse, which is why they also don’t tend to go with adjustable-rate mortgages.

And many borrowers may not have actually known that their HELOC was variable to begin with.

They could jump at the offer to lock in the rate and stop worrying. But this could actually be a terrible time to do that.

You watched helplessly as your HELOC went up and up over the past couple years. And now you’re going to lock it in, when rates are finally slated to fall?

Probably not a good idea. This would just benefit the bank, who will make a lot less if you simply do nothing and let the rate fall as prime drifts lower and lower over the next 12 months.

If you’re curious where the prime rate is expected to go, keep an eye on the fed funds rate predictions. A good place to do that is the CME website.

They’re currently predicting a prime rate that is 2.25% lower by September 17th, 2025, as seen in the table above.

In other words, if you have a HELOC set at 10% today, it might be 7.75% in 12 months. Don’t lock in the 10% rate and miss out on those savings!

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

It’s been a pretty good year so far for mortgage rates, which topped out at around 8% last year.

The 30-year fixed is now priced about one full percentage point below its year ago levels, per Freddie Mac.

And when you consider the high of 7.79% seen in October 2023, is now over 150 basis points lower.

But the recent mortgage rate rally may still have some gas in the tank, especially with how disjointed the mortgage market got in recent years.

Simply getting spreads back to normal could result in another 50 basis points (.50%) or more of relief for mortgage rates going forward.

Forget the Fed, Focus on Spreads

There are a couple of reasons mortgage rates have improved over the past 11 months or so.

For one, 10-year treasury yields have drifted lower thanks to a cooler economy, which is a boost for bonds.

When demand for bonds increases, their price goes up and their yield (interest rate) goes down.

Long-term mortgage rates follow the direction of the 10-year yield because they have similar maturities (mortgages are often prepaid in a decade).

So if you want to track mortgage rates, the 10-year yield is a good place to start.

Anyway, inflation has cooled significantly in recent months thanks to monetary tightening from the Fed.

They raised rates 11 times since early 2022, which seemed to finally do the trick.

This pushed the 10-year yield down from nearly 5% in late October to about 3.65% today. That alone could explain a good chunk of the mortgage rate improvement seen since then.

But there has also been some narrowing of the “spread,” which is the premium MBS investors demand for the risk associated with a home loan vs. a government bond.

Remember, mortgages can fall into default or be prepaid at any time, whereas government bonds are a sure thing.

So consumers pay a premium for a mortgage relative to what that bond might be trading at. Typically, this spread is around 170 basis points above the 10-year yield.

In other words, if the 10-year is 4%, a 30-year fixed might be offered at around 5.75%. Lately, mortgage rate spreads have widened due to increased volatility and uncertainty.

In fact, the spread between the 10-year and 30-year fixed nearly doubled from its longer-term norm, meaning homeowners were stuck with a rate 3%+ higher.

For example, when the 10-year was around 5%, a 30-year fixed was priced around 8%.

Normalizing Spreads Could Drop Rates Another 60 Basis Points

New commentary from J.P. Morgan Economic Research argues that “primary mortgage rates could fall by as much as 60 bps over the next year” thanks to spread normalization alone.

And even more than that if the market prices in more Fed rate cuts.

They note that the primary/secondary spread — what a homeowner pays vs. the secondary mortgage rate (what mortgage-backed securities trade for on the secondary market) remains wide.

Head of Agency MBS Research at J.P. Morgan Nick Maciunas said if the yield curve re-steepens and volatility falls, mortgage rates could ease another 20 bps (0.20%).

In addition, if prepayment risk and duration adjustment fall back in line with their norms, spreads could compress another 20 to 30 bps.

Taken together, Maciunas says mortgage rates could improve another 60 basis points (0.60%).

If we consider the 30-year fixed was hovering around 6.35% when that research was released, the 30-year might fall to 5.75%.

But wait, there’s more. Aside from the mortgage market simply rebalancing itself, additional Fed rate cuts (due to a continued economic slowdown) could push rates even lower.

How Much Will the Fed Actually Cut Over the Next Year?

Remember, the Fed doesn’t set mortgage rates, but it does take cues from economic data.

At last glance, the CME FedWatch tool has the fed funds rate hitting a range of 2.75% to 3.00% by September 2025.

That’s 250 bps below current levels, of which some is “priced in” and some is not. There’s still a chance the Fed doesn’t cut that much.

However, if it becomes more apparent that rates are in fact too high and going to drop to those levels, the 10-year yield should continue to fall.

When we combine a lower 10-year yield with tighter spreads, we could see a 30-year fixed in the low 5s or even high 4s next year.

After all, if the 10-year yield slips to around 3% and the spreads return closer to their norm, if even a bit higher, you start to see a 30-year fixed dip below 5%.

Those who pay discount points at those levels might have the chance to go even lower, perhaps mid-to-low 4s and maybe, just maybe, something in the high 3s depending on loan scenario.

Just note this is all hypothetical and subject to change at any given time. Similar to the ride up for mortgage rates, there will be hiccups and unexpected twists and turns along the way.

And remember that lower mortgage rates don’t necessarily imply another housing boom, assuming higher unemployment offsets purchasing power and/or increases supply.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Anticipation is building for next week’s meeting of the Federal Reserve, when the central bankers should at long last shift into rate-cutting mode. Whether it’s the likely 25-basis-point trim or a bigger, 50-basis-point chop, markets are ready for the Fed’s new look.

But mortgage rates have not waited for the Fed — mortgage lenders basically went ahead and cut their own bangs. This week, the 30-year fixed-rate mortgage rate fell 23 basis points, averaging 6.04%. A basis point is one one-hundredth of a percentage point. Since peaking in early May, average rates for 30-year loans have fallen roughly 125 basis points, or one and one-quarter percentage points.

Because of this preemptive drop, the actual Fed decision is unlikely to give mortgage interest rates a major makeover. If you’ve been waiting for rates to fall in order to refinance, your wait might already be over.

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Refi math adds up

Let’s look at some numbers to get a sense of what a refinance could do for a borrower with a higher mortgage rate. For our example, we’ll use a $350,000 home purchased in October 2022, when 30-year fixed-rate mortgages were running about 7%. With a 10% down payment, the monthly principal and interest payment comes to just under $2,100.

Assuming the borrower just paid this month’s mortgage bill, they currently owe about $308,000 on their loan. And since they’ve been paying their bills on time, they’ve got excellent credit, and a lender offers them a refinance interest rate of 6%. The principal and interest payment on a new 30-year, fixed rate loan will be just below $1,850, saving the homeowner about $250 per month.

In this example, the borrower is dropping their interest rate by a full percentage point. Conventional wisdom says that’s the threshold when a refinance is worth it, but that may not be the case for you. Depending on your circumstances, you may decide to hold out for additional savings or make your move with a smaller rate improvement — say, half a percentage point.

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Beyond the rate

But there’s more to consider than just the interest rate. Refinances come with closing costs, usually between 2% and 6% of the loan amount. Continuing our example, refinancing that $308,000 mortgage would likely cost between $6,160 and $18,480.

Saving money is the goal of this hypothetical refinance, but the borrower won’t see real savings until they reach the break-even point. That’s when the savings from the refi exceeds the money spent on the transaction. Dividing the total cost of the refinance by the monthly savings shows how many months it’ll take to hit the break-even. At the lower end of our example closing costs, it would take about two years for the homeowner to see savings; at the high end, they won’t break even for more than six years. If you’re likely to sell the home before you hit your break even, refinancing might not be worth it.

Loan term is another consideration. In our example, the hypothetical homeowner has owned the home less than two years — starting over with a new 30-year loan wouldn’t add much to the payoff timeline. But depending on how long you’ve had your mortgage and how much you still owe, you could find that while a new 30-year loan drops your monthly payments, you won’t save much over the life of the loan. Paying interest longer could negate the interest rate savings.

If monthly payments on a 15- or even 10-year loan are too high, look for lenders that offer customizable refinance terms. That way, you could potentially lower your interest rate and monthly payment without extending the loan longer than you prefer.

Source: nerdwallet.com