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October 14th, 2008

Mortgage Rates – Going Up

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Home mortgage rates are rising. HSH’s daily national average for the 30-year FRM (conforming) rose to 6.60% on Tuesday, up nearly a third of a percent from Friday. (Read more about last week’s fun in our Market Trends newsletter.)

Why? Two reasons: first, a lot of money that was parked in safe havens like Treasuries has been withdrawn. That caused Treasury yields to rise. (It’s an inverse relationship: as Treasury prices fall, their yields rise… and vice versa.)

Second, it’s a supply issue: investors are concerned about the flood of new debt that’s going to be coming out. “Everybody and his brother is going to be issuing bonds,” according to Keith Gumbinger, HSH VP, “so I’m not likely to be buying much debt today.”

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9 Responses to “Mortgage Rates – Going Up”

  1. cindy doesing Says: October 15th, 2008 at 1:45 pm

    do you think interest rates are likely to rise more this month? I am waiting to lock a rate on a mortgage in rockford, Illinois

  2. Tim Manni Says: October 15th, 2008 at 2:24 pm

    Cindy,

    Thanks for reading our blog, and thanks for commenting.

    In the past week interest rates have risen about 1/3 of a percent, and may rise some more today. In general, interest rates will rise faster than they will decline. Rates may ease off some in coming weeks, but we don’t believe by much.

    If you’re close to locking in your rate, ask your lender if a “Float Down” is available. A float down would allow you to re-lock in your rate if interest rates drop approximately 10-15 days before closing. Ok, so say you have locked in your rate with your lender, if falling interest rates force mortgage rates to fall lower than your locked in rate, you would be able to re-lock in the lower rate (again usually only between the period of time between locking in your rate and about 10-15 days before closing).

    A float down may require a fee, but it all depends on your lender.

    Cindy I hope this helps, contact us if you have any more questions,

    Tim Manni

  3. Doug Says: October 15th, 2008 at 4:12 pm

    So what is the longer-term outlook for Mortgage rates? I just signed and will close in 45-60 days. I don’t think I can lock until <30 days out. With the current state of the financial world, is it likely that Mortgage rates will fall in an attempt to get loans flowing? (I hope so)

    Thanks,
    Doug

  4. Tim Manni Says: October 15th, 2008 at 4:40 pm

    Doug,

    Good questions, thanks for reading and commenting. In the past week or so mortgage rates have risen about 1/3 of a percent, and are on their way up some more (we’re not sure yet on the final numbers).

    When the Fed cut the Fed Funds rate, it unfortunately has no effect on mortgage rates. To help answer some of your questions about what moves mortgage rates up and down, check out this article “http://library.hsh.com/read_article-hsh.asp?row_id=85″ it’s called “What Moves Mortgage Rates.”

    Don’t forget to answer your lender about a “float-down option”:
    Think rates might be lower by the time you close, but are too afraid to let your rate really “float”? A floatdown option may be the best of both worlds. You can pay a small fee (one-eighth to one-quarter point is common) to have access to lower rates if they fall during your commitment period. Another method sets limits of how high or low your rate can travel during the commitment period, but you may start at a rate that is higher than market to start with (i.e. 7.125% with a floatdown option to 6.75% versus 7% with no floatdown option).

    Doug, I hope this info helps, good luck and let us know how you make out,

    Tim Manni

  5. James Says: October 15th, 2008 at 5:27 pm

    I’ve been talking with several different mortgage loan companies and banks during this trying time, attempting to figure out the best option for my situation. I currently have a 5/1 arm, that will lock in 6 mos. I have a small second, through my credit union. The CU is willing to subornate, as I want to stay below the $417,000 threshold to get the lowest interest rate. So I thought I wanted a fixed 30, but a new option was presented to simply do a 5/1 arm all over again. Is this legal/feasible? Risky or just playing the game? Or is simply the cost to perform this excercise every 5 yrs. that makes this approach less attractive?

    BTW, I did the float-down on a past mortgage. Wise decision.

    Thanks for any guidance you can offer.

    James

  6. Joe Says: October 15th, 2008 at 7:40 pm

    Can you explain or point me somewhere to understand the “issuing new bonds” that you mentioned?

    I am closing on my first home in 28 days and am asking about the float lock. Lender says we will need to be locked by November 5. Friday I thought we would being seeing rates drop, not jump.

    Many thanks for the info.

    Joe

  7. Tim Manni Says: October 17th, 2008 at 9:32 am

    James,

    Thanks for your comments and checking out our blog! Let me start off by saying any advice we give, should not be in place or regarded above your trusted advisers, lawyer, financial planner. etc.

    1) A refi from a 5/1 ARM to a 5/1 ARM is certainly legal;

    2) If the CU will “subordinate” your second, you should be free to do a deal with anyone to stay below the $417,000 conforming threshold (provided you don’t run afoul of any CLTV limitations);

    3) If your “time window” for remaining in the home is greater than five years, there’s little reason to consider a new 5/1 ARM — unless the interest rate break is substantial, likely more than a half-percentage point minimum (otherwise, the costs of doing the deal make it less valuable since you won’t actually get any break in total costs over your time horizon).

    You’ll need to do a “cost over anticipated time frame” analysis – calculating the difference in old monthly payment and new monthly payment, with that sum divided into the total costs for obtaining the new loan. The result is the ‘breakeven point’, after which you’ll actually begin to save money.

    4) Depending upon the structure of the ARM and the index to which it’s tied, you might want to hold onto the ARM for a while — adjusted rates for Treasury-based ARMs are actually declining at this point (LIBOR-based, though are heading in the other direction).

    -Answered by HSH VP Keith Gumbinger-

    Hope those answers help you out James. Best of Luck, hope to see your comments again, enjoy the blog, thanks,

    Tim Manni

  8. Tim Manni Says: October 17th, 2008 at 9:49 am

    Joe,

    Thanks for your interest, we appreciate your comments and visiting our blog.

    Our VP here at HSH Associates, Keith Gumbinger, put together some answers to your questions regarding bonds:

    “It’s a matter of supply and demand. When an item is in short supply, the price of that item rises; when plentiful, the price falls.

    In the case of bonds, a lack of supply causes prices to rise. An increase in price means that the ultimate return to the investor is lessened, so his yield is lower. Lower yields means lower mortgage rates.

    Think of it like this (and quite simplistically).

    A $1,000 one-year bond is for sale. It has a 5% yield.
    After one year, the return to the investor will be his $1,000 PLUS $50 in interest. His yield is 5%.

    Two bidders show up for that bond (demand exceed supply, since there’s only one bond available). One buyers offers to pay only full price — $1,000 for a $1,000 bond. The second offers to pay $1,010 for that $1,000 bond, or $10 over the face amount. The seller of the bond can make a $10 profit on the sale (or actually, only has to actually borrow
    $990 since he’s got $10 free and clear), so he selects the second buyer. The bond yields 5%, but since the second buyer has paid an additional $10 to buy the bond, the second buyer’s actual return is only $40 ($10 comes out of the anticipated $50 in interest). Therefore, his actual
    yield isn’t 5%, but only 4% ($40).

    This assumes the bond being offered is valuable and investors desire it, and there are more bidders than bonds. The reverse is also true.

    If the seller has lots and lots of bonds, but there are few interested investors (lots of supply, little or finite demand) the seller may have to offer the bonds at a discount — selling a $1,000 bond for just $990, perhaps. The discount serves to attract buyers — the bond still has a base yield of 5%, but for $990, the buyer will get a full $1,000 back after a year, PLUS the $50 in interest. This improves the return (yield) to the investors — in this case, this buyer has an actual return of $60, or 6%.

    So, a glut of supply which meets declining (or even finite) demand means there will be more bonds available than buyers. The prices of the bonds will decline to help attract them, which makes the yields higher. In this case, these are yields on Treasury Bonds, which have an influence
    on fixed mortgage rates; hundreds of billions of dollars of new bond issuance will be coming to pay for the various “bailout”, “rescue” or “support” programs.

    This is also the case with mortgage bonds — too many sellers and too few buyers in the market these days — keeping prices low and yields (and mortgage rates) high.

    Rates probably won’t decline very quickly, but there’s little reason for them to keep rising at the moment. If they do decline, though, a float-down option would allow you to take advantage of that decline.”

    Joe check out our article, “What Moves Mortgage Rates” (http://library.hsh.com/read_article-hsh.asp?row_id=85).

    Joe, we hope these answers were of a help. Hope to see some more of your comments soon, thanks for reading!

    Tim Manni

  9. answers to Foreclosure Questions Says: September 7th, 2009 at 12:12 pm

    answers to Foreclosure Questions…

    Rolling Acres Mall; Akron, Ohio | Labelscar: The Retail History Blog is an excellent post on answers to Foreclosure Questions….

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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