March 23rd, 2020 9:28 AM by Jackie A. Graves, President
Federal Reserve cutting interest rates to near-zero, some consumers may have
gotten the idea that mortgage rates are heading there, too. But that’s just not
the case, though mortgage rates remain near historic lows, making a new
mortgage or refinancing attractive for many.
response to the coronavirus, the Fed cut rates over the weekend, dropping the fed
funds rate one full percentage point to a range of 0-0.25
percent, the largest emergency reduction in the bank’s more than 100 years of
existence. Investors’ expectations of a rate cut as well as the actual cut
helped drive the 10-year Treasury note below 1 percent. The 10-year note is
key, because it’s a benchmark for 30-year mortgage rates, and often the two
move in similar directions.
think of the 30-year mortgage rate as a combination of the 10-year Treasury
rate plus an additional markup called a spread. That spread makes it worthwhile
for the bank to lend the money, covering the bank’s operating costs and
generating a profit. Without a spread over its own cost of funds, a lender
could not continue to operate and fund loans.
that’s why mortgage rates are consistently well above the rate on the 10-year
note. Typically the spread is
around 1.8 percentage points or so, say experts, but that can and
does change with market conditions. The chart below shows mortgage rates and
the 10-year note over the last year as well as the spread between the two. Note
how the spread has actually risen as the 10-year fell.
has dropped substantially in the last month, while 30-year mortgage rates have
fallen, too, but not as much. The net difference – the spread – has actually
widened in that timeframe, as you can see with the upward climbing line in the
graphic. The spread now sits at 2.54 percent. In periods where the 10-year
notes dips a lot, the spread may climb somewhat.
the Fed lowers rates to zero, putting downward pressure on mortgage rates,
potential borrowers shouldn’t expect their borrowing costs to move toward “free
money” any time soon.
Where are mortgage rates now?
just released its latest weekly average mortgage rates, and the results show
rates have actually climbed over the last couple weeks, even as the 10-year
Treasury yield has mostly fallen. The average 30-year rate in Bankrate’s survey
rose 11 basis points to 3.88 percent this week, after moving up 19 basis points
the previous week.
driving that shift higher when other rates are actually falling? One reason is
that low rates have encouraged a massive wave of refinancing, including cash-out refinances, which are at an
11-year high. That spike in popularity has overwhelmed the ability of banks to
keep up. So in some cases lenders are actually raising their rates to make it
more profitable. Others raise rates to discourage new business because their
underwriters are too busy.
other cases, loan originators are overwhelmed by the volatility of the market
and need to raise their own rates in order to ensure that the loan remains
profitable for them.
now remains a good time for many borrowers – millions, actually – to refinance
their mortgage and reduce their monthly costs, especially as some economic
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