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
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
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
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
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
Talk to your financial advisor and run the math to
determine if refinancing makes sense for you and
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