What influences mortgage rates and refinancing?

With interest rates on 30-year fixed rate mortgages now down to about 3.75%, many homeowners want to eliminate their current, more costly loans. In fact, the Federal National Mortgage Association expects refinancing to account for up to 30% of 2019’s new mortgage business.

Fannie Mae’s big bold prediction

Fannie Mae recently issued another prediction that the average 30-year fixed mortgage will be 3.70% in the second half of 2019, which is down considerably from their prediction of 3.9% just 30 days ago. That’s a big bold prediction.

Note that in the first quarter of 2019, the average 30-year was 4.4% and that dropped to 4.0% in the second quarter of 2019.

Cheaper mortgage rates will undoubtedly cause home prices to rise and Fannie Mae also expects home prices to grow 5.4% this year (up from their 4.6% forecast earlier this year).

So, does refinancing really make sense now?

Do the math

To justify a new round of appraisal, loan origination, and closing costs, financial advisors advise that you consider a new mortgage only if its rate is at least one point lower than the rate on your existing loan and you plan to stay in your home for two or more years.

For most homeowners holding fixed rate mortgages, that means a rate below about 5 percent. That’s almost everyone who took out their loans over 10 years ago, when rates were well over 5% (rates peaked in the fall of 1981 – when they were about 18.5% - that’s not a typo).

The decision is less clear-cut for homeowners with adjustable rate mortgages (ARMs), in part because of the way the rates are set. Most ARMs are pegged to 1-year Treasuries (recently 1.87%), while 30-year fixed rate mortgages are generally indexed to 10-year notes (a bit less at 1.70%). Since short-term rates have fallen consistently since November of 2018, when the 1-year stood at about 2.73%, rates on ARMs could drop further than those on fixed rate loans this year, reducing the temptation to refinance.

But, if Treasury yields head back up later this year, as some predict, locking in now might make sense. The challenge of course is that for every person predicting rates to move up, you’ll find another one predicting them to fall.

The conclusion is that the longer you plan to stay in your home, the more attractive refinancing may look. But do the math.

What influences mortgage rates?

• Stock Markets. When major stock indices are higher, it’s generally bad for mortgage rates. When investors are buying equity shares they’re often selling bonds, which pushes prices of Treasuries down, and increases yields and mortgage rates. The opposite happens when indices fall.
• Gold Prices. When gold prices fall, it’s generally bad for mortgage rates and when gold rises, it’s better for mortgage rates. Gold tends to rise when investors worry about the economy, causing investors to push rates lower.
• Oil. When oil prices rise, it’s usually bad for mortgage rates because energy prices play such a large role in creating inflation.

Of course, those are just a few macro-events that influence the direction of mortgage rates. There are so many more influencers.

Could we see negative mortgage rates?

Negative mortgage rates might sound like a fantasy to U.S. homeowners – when the lender actually pays the borrower, but they are not unheard of. In fact, the Danish Jyske Bank is offering a mortgage that pays the borrower.

Jyske Realkredit is offering a fixed-rate mortgage with a nominal interest rate of minus 0.5%. Of course, there are certain fees attached to that, so it’s important to read the fine print.

Further, many bonds worldwide carry negative interest rates. In fact, according to Bloomberg, about $14 trillion of outstanding bonds worldwide – that’s 25% of the market – now trade at negative yields. For example:

• The German 30-year government bond yield recently dipped into negative territory for the first time ever
• The German 10-year bond is minus 0.58%
• 10-year treasury bills in Japan are priced at minus 0.22%
• The overnight borrowing rate for banks through the European Central Bank is minus 0.40%
• The Riksbank – Sweden’s Central Bank – has a minus 1.0% deposit rate for banks

Will rates go negative in the U.S.?

In simple terms, it all depends on supply and demand. If there is demand for U.S. debt at negative rates, then it could happen.

Is it likely to happen to mortgage rates? Not so much. But then again, how many accurately predicted a 10-year plus bull market here in the U.S.?

The point is that rates could go lower. They could also go higher. Talk to your financial advisor and run the math to determine if refinancing makes sense for you and your family.