Question: My fiancée and I are in the process of buying a new home. Does a drop in the Federal-funds rate influence the fixed-rate mortgage? Thanks for your help and guidance.
- Victor Prosper
Answer: Victor, mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note (at Tuesday’s close 4.383%.). Lenders typically set their base mortgage rate around two percentage points higher than the 10-year bond yield. Rates on adjustable-rate mortgages are tied to yields on two-, three- and five-year Treasurys. These short-term loans are more sensitive to Fed rate movements, and those with the shortest maturities see the greatest impact when short-term rates rise and fall.
So if you want to know the direction of mortgage rates, you need to get a sense of where bond yields are heading. Investors tend to flock to the safety of U.S. Treasurys when they’re worried about the state of the economy. That "flight to quality" drives bond prices higher and their yields lower. (Bond prices move inversely to yields.)
Over the last few months, bond yields have dropped - and mortgage rates followed - on worries about the impact of bad loans on the credit markets, the state of the labor market, and the weakness in the housing market, among other things. If economic data in the months ahead shows signs of weakness, bond yields may continue to slide - and mortgage rates along with them. On the other hand, if the economy shows signs of resilience, bond yields may rise - and mortgage rates along with them - as investors abandon bonds to seek out more aggressive investments.
That said, trying to time mortgage rates is a waste of time. Rather than gamble and wait on lower rates, consider a lender that is willing to let your rate "float down" if mortgage rates drop after you’ve locked in your loan, but before the closing. Lenders often charge fees for float downs - typically around 0.25% of the loan balance - so make sure you understand the loan’s terms of the float down before you choose the option. Competition is fierce for borrowers with good credit and a substantial down payment in this tight credit environment, so if you’re lucky enough to be one of them try to negotiate with the lender to eliminate the float-down fee.
The type of loan you need may also make float downs a good option, says Keith Gumbinger, spokesman for financial publisher HSH Associates. If you’re in a typical fixed-rate loan, "your mortgage rates have been declining for weeks," he says. "Less so is the case with jumbo mortgages." If rates on jumbo mortgages - loans above $417,000 - begin to decline as well, "that float down option could yield you big savings," he says.
Readers, are you waiting to shop for a mortgage, hoping rates fall, or do you think rates are as low as they’re going to get in the near-term? How low do rates have to drop to get you to take out a mortgage, or refinance your loan?