Why Mortgage Rates Have Risen This Week
Earlier this week, I discussed what the Federal Reserve’s decision to cut interest rates to near zero would mean for your money. Among the consequences: the forecast that mortgage rates will fall significantly.
But then the rates went up. Here is an email I received from a confused reader:
I’ve been tracking mortgage rates for the past couple of weeks. Rates fell to the point that it made us think about refinancing. I was shocked when I checked today and saw that the rates had jumped by almost two points. Could you please do an article explaining why? Fed rates are low and job security is weakening. I thought it would lower rates. Is it because so many people have rushed to refinance that they are overwhelmed, and how do you slow down applications?
See this little spike on the chart? It’s this week. What gives?
I checked with WalletHub , which predicted the drop in mortgage rates I mentioned in my post. Analyst Jill Gonzalez said that while a Fed rate cut usually results in lower mortgage rates, the coronavirus outbreak is adding new levels of complexity. “Many bank head offices have introduced remote work for an indefinite period. Bank branches themselves limit opening hours and staffing, ”she said. “Thus, banks are looking for ways to help prioritize workflow, including keeping rates high to stave off an increase in refinancing applications.”
But wait, aren’t mortgage rates determined by bond prices ? Greg McBride, chief financial analyst at Bankrate.com , explained it this way: ” The money grabbing taking place in the financial markets means that everything that isn’t nailed is being sold, including treasury bills and mortgage-backed bonds.”
As selling pressure drove the prices of mortgage-backed bonds down, their yields rose, pushing up mortgage interest rates.
Add to that a resurgence of interest in refinancing and you have what McBride describes as “a traffic jam on the road to refinancing mortgages.”
“As a result, lenders publish rates that act as a disincentive rather than an invitation to apply,” he said.
But this is temporary, he stressed. “As lenders process the initial wave of mortgage applications and the smooth functioning of financial market earnings, mortgage rates should normalize relative to Treasury yields. This is one of those rare cases when it is better to wait for refinancing than to rush. “