March 27, 2020—Since the onset of the Covid-19 pandemic in the U.S., mortgage rates continue to swing up and down, sometimes hourly. With economic uncertainty and state-wide shelter-in-place orders, fluctuations in rates are unprecedented. Typically, when an economy struggles, mortgage rates fall, so why the wild seesawing? Let’s take a closer look from the financial perspective.
Reasons Behind the Roller Coaster Ride
Rates bottomed-out near the beginning of March, 2020, sending tons of home owners running for a refinancing gold rush. It’s no wonder, these home owners could saves hundreds of dollars per month and tens of thousands over the course of a 30-year loan with the decrease in rates. But many lenders could not handle the scores of people applying for refinance in such a short period of time. Many had to hike up their rates just to slow down the traffic of applicants.
The bigger driver of volatility lies with the mortgage-backed securities market. Lenders typically sell their mortgages to a secondary market that bundles them into securities (mortgage bonds) that are sold to investors. These investments are seen as “safer,” much like U.S. Treasury bonds. But with the glut of bonds on the market (thanks to all the refinancing and the federal government issuing more bonds to fund economic stimulus measures), bond prices decreased. When bond prices are down, mortgage rates go up.
The federal government made a pledge to buy up at least $500 billion in U.S. Treasury bonds and $200 billion in government mortgage-backed securities in the next few months. This will likely stabilize the mortgage-backed securities and bring down mortgage rates again.
Investors are worried and many want to remain more liquid during a health and economic crisis. So as the stock market seems to be changing by the minute, so are mortgage interest rates.
What This Means for Home Buyers and Refinancing
Lower rates give home buyers the chance to raise their buying power. Many lenders are advising clients to complete their loan paperwork (whether refi or new loans for a home purchase) as soon as possible. That way, should loans take another dip, they are ready to lock in a rate. There’s no way to time the lowest possible rate, but anything in the lower to mid- 3% range right now can be viewed as a win considering that rates were over 4% nearly a year ago. If refinancing, don’t forget to calculate all the associated fees, which can negatively offset longer-term savings.
Real Estate Term of the Week
Mortgage-Backed Security: A type of asset-backed security which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment bank) that packages the loans together into a security that investors can buy with the hopes of making a profit over time.