Mortgage rates have been on a ride over the past year, and the ride has been heading mostly down hill. Rates ticked up a bit over the past month, but have now bounced back down to tie the lowest rate on record. One of the toughest decisions for homeowners is to decide whether now is the time to refinance.
Let’s do a little Mortgage 101 to understand how the mortgage market works. The 30 year fixed rate mortgage tends to track up and down with the 10 Year US Treasury rates. The spread between the 10 Year US Treasuries and the 30 year mortgage expands and contracts over time due to market conditions, but is usually in the neighborhood of a 2% spread for a prime credit homeowner with a conventional mortgage. That means the interest rate on 30 year fixed rate mortgages would be roughly 2% higher than the 10 Year US Treasury rate. In today’s market, we are seeing slightly tighter mortgage spreads of approximately 1.7% for prime borrowers with a conventional mortgage.
As of Friday, the 10 Year US Treasuries are yielding 1.76%. And the Freddie Mac Primary Mortgage Market Survey published on Thursday quoted a weekly average rate of 3.49% for a 30 year fixed rate mortgage, with an average of 0.6 points paid at closing. So the difference between the 1.76% for the 10 Year Treasury rate and the 3.49% for the 30 year fixed mortgage rate is 1.73% or 173 basis points.
Now, let’s look at the big picture and bring this into perspective. First, we have not seen the 10 Year Treasuries at such a low range in our lifetime. The principle driver of these low Treasury rates is what Wall Street refers to as the “fear trade”. Given the growing concerns over the health of the US economy, the boiling sovereign debt issues driving the Euro crisis, and the significant slowdown of the Chinese economy, investors have flocked to US Treasuries as one of the safest places to park money until things get resolved. As demand for these Treasuries increase, their prices go up, and the interest rates paid on the Treasuries go down. All of this is affecting your mortgage rate. We are living in a truly global market.
The 10 Year US Treasury rate has recently ticked up to 1.76%, which is still at an incredibly low level. For comparison, it has been as high as 15.84% back in September 1981, and as low as 1.43% this past July. The mean over the past 100 years has been roughly 4.5%. We’ve seen this more normalized range over the past decade with 10 Year Treasuries yielding 4% to 5%. So a return to the norm would certainly not be a surprise, once the economy starts to recover at a more robust pace.
So as you ponder when to refinance, you have to ask yourself the question: Are rates more likely to go up, or go down? Based on where the 10 Year Treasuries are trading today at 1.76%, they’re a lot closer to “zero” than the all time high of 15.84%. If they experience a dramatic drop to 1.0% which would be another record low, you might see a 3.0% fixed rate 30 year mortgage. If they revert to the historical mean of 4.5%, you’ll most likely see mortgage rates in the 6.5% range. Yet today, you can get a 3.49% mortgage if you have a prime credit rating.
We can’t predict where US mortgage rates are headed with precision. If we have a further meltdown in the global economy, rates could possibly drop a bit further. But looking at the big picture over the past 100 years, it’s pretty obvious that mortgage rates have way more room to go up, than down.
My advice for you is to not let greed take control of your thinking. We are enjoying the lowest mortgage rates on record. If you’re thinking about refinancing, go online and do some comparison-shopping for rates. LendingTree and Bankrate are great places to start. Then lock in quickly with your favorite lender. The savings on your monthly mortgage payment will be a certainty.
And one day down the road, you’ll be able to tell your grandkids about the ridiculously low mortgage rate you were able to get, way back in 2012.