Tuesday, December 01, 2015 • 09:47

Rates are up. Rates are down. It must be Thursday!

October 16, 2013
I deal with interest rates every day in my business as a mortgage originator. In order to keep tabs on the movement of rates I subscribe to two different services which alert me via text message when the market is changing, for better or for worse. My phone is buzzing several times a day.

John Yeager
What drives interest rates? The bond market and more specifically the Mortgage Backed Security bonds determine the rates on 30-year and 15-year fixed rate loans. When there is uncertainty in the world that could affect the stability of the Euro, for example, money flows into the United States bond market as a safe haven. More demand for our bonds increases their price and decreases the interest rates on the bonds, which then affects the mortgage loans which back those bonds.

The Federal Reserve (Fed), using its Operation Twist, has been printing money in the back room and using that freshly-minted cash to buy bonds to the tune of $85 billion dollars per month. This little gimmick alone has been instrumental in keeping mortgage rates at all-time lows.

A couple of months ago there was the hint from a Fed Statement that Operation Twist may end sooner than was previously announced. That hint alone caused rates to jump from 3.5 percent or less on a thirty-year fixed rate loan to up to 5 percent on the same loan in a matter of weeks.

Since then, 30-year fixed rates have settled back down to the mid to low fours, still nowhere near the recent lows of the beginning of May 2013.

This brings to mind the next question, where are mortgage rates going?

We know that turmoil around the world will lower our mortgage rates. If our economy looks like it is getting better, rates will increase. Default on government debt via the debt ceiling gridlock will almost certainly increase rates quite a bit. The hint of Operation Twist coming to an untimely end means rates up. China slowing down bond purchases means rates go up. Recession means rates go down. Inflation means rates go up. In fact, there are probably a thousand events that can alter mortgage interest rates, most of which haven't even been thought of yet.

The point is that on a short-term basis it is impossible to know where rates may be going. All we can say definitely is they will change. Sometimes they go up, sometimes rates go down. I feel certain we will have dramatic moves like we saw in the last few months. We will have trends where rates move up or down slowly. On any given day rates may change direction two, three, four or more times.

My advice to my clients is to lock in the rate on their loan sooner rather than later, since rates will go up a lot faster than they will come down. On a purchase loan, that means lock in the rate as soon as possible after opening escrow on your purchase. On a refinance there is a bit more flexibility to wait, but just make sure it isn't May 3, 2013. Looking back, that is the recent low point in rates. If you were waiting for rates to go down just a bit more, you would still be waiting!

John Yeager is the Valley Center Branch Manager for Summit Mortgage, NMLS #219612.

He can be reached at 760-749-8931 or by visiting
www.john-yeager.com, via email at jyeager@summit-mortgage.com.

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