A Breakdown of Mortgage Interest Rates

As news broke of coronavirus disease 2019 (COVID-19) spreading globally and nationwide in recent weeks, economic uncertainty quickly followed. The Federal Reserve reacted by lowering its benchmark federal funds rate and the 10-year Treasury Yield followed suit. While mortgage interest rates adopted a far less linear trajectory (decreasing, then increasing again and again), they have reacted to the COVID-19 health crisis nonetheless.

The volatile state of mortgage rates may have left you frustrated recently as the excitement of historically low rates may have been dashed by a dramatic interest rate climb in a matter of days. Rest assured, you’re not alone. The uncertainty caused by fluctuating mortgage interest rates has likely added to the anxiety of the American public. Knowledge undercuts uncertainty, which is why it’s important to understand the factors motivating these unusual mortgage rate changes. Furthermore, understanding the current state of home loans may benefit you as you navigate your homeownership journey.  

What You Need to Know About Mortgage Rates

• Mortgage rates typically track the 10-year Treasury Yield (not the Federal Reserve rate), give or take. This is because a treasury investment is one of the safest investments available. When the 10-year treasury yield goes down, a reduced investment risk is implied for the investment market overall. When investment risk decreases, so does the expected return (and vice versa). So, with less risk for investors purchasing mortgage-backed securities comes lower interest rates on home loans.
• As the 10-year Treasury Yield plummeted (in early March), refinance applications skyrocketed. In fact, the mortgage industry experienced an inflow of applicants like rarely seen before, which lead to a significant backlog of loan applications.
• Supply and demand are driving current volatile rates. Mortgage professionals, wholesale lenders (those who fund loans) and banks quickly became overwhelmed by the surge in loan demand, precipitated by the historically low rates available at the time. As a result, wholesale lenders and banks were forced to increase interest rates to slow the inflow of applications. This occurred across the country and the across mortgage industry. In other words, the demand became too high and the only way to reduce it was to limit the supply via higher interest rates.
• The 10-year Treasury Yield and mortgage rates are now decoupled. Because the 10-year Treasury Yield has remained extremely low while the mortgage industry has had to respond to unmanageable demand by increasing mortgage interest rates, the two are not currently tracking together.
• Expect continued mortgage rate volatility. Some lenders are adjusting interest rates by the hour, in response to demand and their own capacity. Mortgage brokers, like those in the Motto Mortgage network, can help you shop rates and loan programs from a variety of lenders. Don’t forget that your mortgage professional is your closest ally as you seek to secure a purchase or execute a refinance.

Tips for Borrowers

• Act quickly. With mortgage rates adjusting swiftly, it may be important to lock an appealing rate when you can.
• Consider a longer lock. The recent demand on home loans and refinances has created a significant back log of loan applications which has slowed lender processing, underwriting and closing timelines in many cases. Your loan application may require more processing time, which means opting for a longer rate lock could prove prudent.
• Rely on your mortgage professional. Your mortgage professional is there to advise you and to explain your home purchase or refinance options with patience and understanding. Never hesitate with any questions about your home purchase or refinance loan application.

While the recent climate of uncertainty can be unsettling, understanding the economic situation can help quell concerns and frustrations. Yes, mortgage rates are currently unpredictable, but your mortgage professional can help you through it. And, as you protect the health and the health of your loved ones, remember that The Motto Mortgage network allows you to complete your mortgage process digitally from the comfort of your own home.