As the year began it looked like a good time to refinance the mortgage. Rates were going down, and everybody thought they’d go lower.
The tough call: How low was low enough?
Then came an unexpectedly strong employment report March 8, which investors interpreted to mean the Federal Reserve would not lower interest rates soon. Stock prices tumbled, bond prices dived and bond interest rates went up.
And mortgage rates stopped flirting with the 7 percent level and made refinancing less attractive.
In less than two weeks, someone expecting to replace a 9 percent, $190,000 mortgage with a 6-7/8-percent mortgage for 30 years was suddenly looking at 7-3/4 or 7-7/8 percent, or $114 to $130 more a month.
A number of mortgage applications were canceled, but most of the refinance loans that were in the works were not affected because most applicants chose to lock in their rate rather than gamble that it would go lower, according to Marc Leone, vice president and Rhode Island production manager for BancBoston Mortgage Corp. But stretching for the lowest rate may have led a few more than usual to try the float.
“In normal times, most lock in because they know of the volatility of the rates,” Leone said. “I think the rate environment lately has given people a false confidence that caused them to choose to float. In doing that they were exposing themselves to more risk, but what they were trying to do was time the bottom of the rates, which people often do when rates are coming down, and every indicator seems to be that rates will continue to decline.”
Until rates started up, the refinancing market was growing. But Randy Snow, senior vice president at Bank of Newport, expects that to reverse.
For now, the pressure on mortgage rates is definitely upward. “As we speak, bonds are going the wrong way,” said Snow.
The 30-year Treasury bond is the security to watch to figure out mortgage rates, in part, because it is the same period as the 30-year mortgage, Leone said.
“We don’t really price off them,” said Snow, “but they give us an idea of how long-term assets are going to perform. If you’re writing a 30-year, fixed-rate mortgage, you know that isn’t going to change, even if the market goes up or down. Each company has its own policies. Some may change their rate every time the market moves up 4/32nds of a point, some wait until 7/32nds or 10/32nds. It isn’t a universal science.”
But things like job growth, economic growth and inflation set long-term markets to worrying. And, as the unemployment episode shows, can mean higher mortgage rates.