Buying a home is rarely a snap decision. Most people spend at least 18 months lurking on Zillow and going to open houses before ever calling a mortgage broker or REALTOR® — but by the time they do, they’re ready to move. Literally. But sometimes the market has other things in mind.
When I get calls about MVB’s rates, it’s almost always from someone who is on day one of their home buying journey.
The conversation usually goes like this:
BUYER: What’s your best rate for a 30 year fixed? I’m putting 20 percent down, and I have a FICO of 782.
ME: Are you buying a home in the next week?
BUYER: No. Maybe in six months or so.
ME: Well, then it depends.
BUYER: On what?
ME: You, the U.S. and world economy, the stock market, bond traders and the precise day you write your offer.
Now, I’ll admit, that’s not an easy or popular answer. But it’s honest, and based on the reality that bonds drive the mortgage market.
Mortgage rates move in tune with the bond market. If you’re not a bond expert (like 99.9987689 percent of the world), bond pricing can seem (alright, is) confusing. But here are a few simple principles to keep in mind:
Let’s put this in real terms. Say you bought a $10,000 bond in 2006, with a three percent yield (or rate) for 10 years. Sounds good, right? You’re making $300 a year in interest, or $3,000 on your $10,000 investment.
But … here’s where it gets tricky.
Let’s say you take your $300 to the grocery store in 2006 and buy 100 gallons of milk at $3 at gallon. But in 2007, the price of milk goes up to $3.87. Now you can only buy 77 gallons with your $300. If you’d known that the cost of milk was going to shoot up so much, would you have agreed to such a low rate on your bond? Probably not.
In fact, for you to be willing to take the risk, you’d need a return of 3.875 percent so you can still buy your 100 gallons of milk.
Mortgage bonds (which are essentially big bundles of mortgages assembled into a single bond) trade with the very same behavior in mind. If bond investors think the price of goods and services are likely to rise, they will not buy a bond unless it pays them enough yield to make it worth the risk.
All you need to do to see this in practice is to look at what’s happened to mortgage rates since Donald Trump was elected in November 2016.
At that time, many investors believed that the Republican led House and Senate would adopt a pro-business, deregulated, tax-friendly policy. Wall Street thought that might lead to more jobs, higher wages and … you guessed it, inflation. Immediately after the election, lower rate bonds sold off quickly, and new bonds have a new, higher interest rate.
In fact, according to Freddie Mac, average mortgage rates were 3.55 percent the day of the election. In a matter of days, they jumped to four percent, and a few weeks after that, 4.3 percent. While it’s worth noting that these are still historically low rates, it was a big surprise for many buyers.
That’s why you can’t predict months in advance what your mortgage rate will be. But you can call us to talk about the market, so you have a full understanding of where things are headed.
We can’t control the market, but we can make sure you get the very best mortgage you can when you decide to buy.
We will help you understand your options, so you get the right type of loan for your situation. Mortgages are not a one-size-fits-all product, particularly when rates are in flux and you’re buying your first home (or your fifth). We will identify a rate lock strategy for you that helps you achieve your goals and keeps you informed every step of the way. We wouldn’t have it any other way.