How Rates Move/Rate Lock

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market.  This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events.  When MBS pricing goes up, mortgage rates or pricing generally goes down.  When they fall, mortgage pricing goes up.  Tracking these securities real-time is critical.  

Why Mortgage Rates Move

Unlike most other interest rates, those for mortgages (except ones for existing adjustable-rate mortgages) are largely determined by the supply of money into the market from investors and the demand for such loans from consumers. That supply is heavily affected by the amount of risk investors are prepared to sustain in their portfolios. When spooked by economic uncertainty, they tend to buy safer assets, including mortgage securities, which can result in an increased supply of product (cash) that drives down the price (rates). When they’re more confident, they tend to invest in riskier but more profitable assets, which reduces the supply of money for home loans, and pushes up rates. A second influence is perceptions of how inflation rates are likely to move over the long term, but that usually tends to be a less important factor in daily and short-term movements. None of this is to suggest the Federal Reserve doesn’t affect mortgage rates, merely that it does so only indirectly by influencing investor sentiment.

The relationship between 10-year Treasury bonds and mortgage rates is more complicated. Investors generally view those bonds and mortgage securities as similarly secure havens for their money when they’re spooked – with bonds the safer of the two. That means they tend to buy or sell both at the same time, depending on their level of confidence in the U.S. and global economies. So many lenders refer to those particular Treasury yields when setting their rates. Usually, the relationship between 10-year Treasury yields and mortgage rates is surprisingly close, though rates tend to be less volatile, and sometimes the two drift apart a little.

How will I know if mortgage rates are going up or down?

 

bond yield mortgage rates

Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

 – 10-year bond yield up, mortgage rates up.

– 10-year bond yield down, mortgage rates down.

So a good way to predict which way mortgage rates are headed is to look at the 10-year bond yield. You can find it on finance websites alongside other stock tickers, or in the newspaper.  If it’s moving higher, mortgage rates probably are too.  If it’s dropping, mortgage rates may be improving as well.

Mortgage Interest Rates

Conventional (Fannie Mae/Freddie Mac and Non-Agency investors) and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact us directly. We are among few mortgage companies who have access to live trading screens during market hours, in addition to pricing software that compares the top wholesale lenders in the market for pricing competition and comparison.

Mortgage Interest Rate LockYour VMG Loan Consultant will discuss the bond market trends to confirm if locking (securing rate and pricing quoted) or floating (rate and credit/cost subject to change with bond market) is suggested for that day and also make sure you’re lock matched current market turn-times (i.e. 15, 20, 30, 45, or 60+ day locks).  Longer locks may apply to new construction or other situations.  See your Loan Consultant with questions and below for common Q & A.

Q&A Regarding Rate Locks

What is a rate lock?

A rate lock is a guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period. The price for a mortgage loan is typically expressed as “points” paid to obtain a specific interest rate.  Your VMG Loan Consultant will show you several rates equating to optional buy-down or buy-up (lender credits) to determine what pricing is most favorable for your situation.

When do I lock an interest rate?

You’re in a position to lock in an interest rate when your application is received, loan approved, and purchase contract executed (or if a refinance immediately following application).

How much does a rate lock cost and what if my lock expires?

VMG does not charge any application or initial rate lock fees.  If the rate lock is going to expire, your Loan Consultant will discuss the extension or re-lock options with you which may impact lender credits (if applicable) or net costs vs. original lock terms.  Each investor holds a specific lock policy and calculation for any costs associated with lock extensions or re-locks.

What is a mortgage rate lock float down/renegotiation?

A mortgage rate lock with the option to reduce the locked interest rate if market interest rates fall during the lock period. A rate lock with a float-down option can provide the borrower with security against an increase during the rate lock period, while the float-down option allows the borrower to take advantage of a fall in interest rates during the lock period.  Due to the large number of investors VMG works with, each carry a unique rate lock renegotiation policy.  The option will only be exercised by the mortgagor after an internal adjustment to price and if available as a benefit to the borrower.  VMG always monitors pipeline for any opportunities.

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