Dwindling Mortgage Rates
Buying a property comes with its own set of challenges. The major hurdle, however, is financial in nature. Mortgage rates have been sky-high for a long time. This has been delaying investment decisions for a majority of the property buyers. However, a major sigh of relief is now offered to the buyers by the dip in the mortgage rates. Long-term mortgage rates have been dropping consistently and the pattern has been that in the last six weeks, prices dropped for five weeks.
A year ago, prices were lingering at an all-time low when it stood at 3.96 percent. However, post the lull, rates have increased consistently, and followed by a drop in mortgage rates. According to FreddieMac, last week fixed-rate mortgage prices dropped from 4.55 percent to 4.52 percent. The average rate for 15-year, fixed loans was hovering at 4.04 percent, which dwindled to 3.99 percent as per current trends.
How are mortgage rates calculated?
Knowing your mortgage rate is very essential, as a drop in rates mean huge savings. A change in rate by even 0.125% could mean saving thousands of dollars annually. The total savings over the entire period would be much higher.
The sale and purchase of 10-year treasury bonds is the best indicator for determining whether the rates will rise or fall. 10-year treasury bonds, also known as Intermediate Term Bonds (ITM), are also packaged into Mortgage-Based Securities (MBS). Both of these are similar financial instruments and attract the same investors.
Compared to mortgage-based securities, treasuries are guaranteed to be paid back as they are priced at lower rates. Mortgage-based securities are priced at a higher rate to compensate for risks like defaults in payments and early repayments.
Typically, when bond rates go up, interest rates go up as well, and vice versa. Investors prefer bonds – as bonds are a safe investment in case of poor economic outlook. When bonds’ purchases increase, the associated bond yields fall. This causes the mortgage rates to drop as well. When the economy bounces back, investors prefer investment in stocks, this forces the bond prices to go low which increase the interest rates.
As per the current trends, mortgage rates decreased – as there has been a surge in investors buying treasury bonds. The bond yields peaked at 3.11 percent in May. However, due to poor financial markets caused by the ongoing trade war, bond yield have dipped to 2.83 percent.
Buying a house at these mortgage markets may prove beneficial to prospective investors. There are other aspects as well which an investor must look into which may increase the costs significantly.
Financial Outlook
FreddieMac’s chief economist Sam Khater, explains that the average rate calculated by him is dependent upon the survey that he carries out each week. He conducts a survey of lenders across the country between Monday and Wednesday each week. The results of the survey help him determine the average mortgage rates. This average doesn’t factor the extra fees that borrowers must pay to obtain lower rates.
This fee is calculated in points. The average fee has remained unchanged on 30-year fixed-rate mortgages at 0.5 points.
He also explains that despite the recent declines, long terms rates are still hovering at their highest levels in seven years. The average 30-year mortgage rate this year reached a high of 4.66 percent on May 24 while the 15-year mortgage rates hit 4.15 percent the same day.
An investor must consider all market scenarios and financial implications before making any investment.