When Mortgage Rates Rise
What causes mortgage rates to rise? The rates on mortgages tend to rise and fall in tandem with the yield rate of 10-year Treasury bonds. When the bond yield rises, mortgage rates tend to rise, too. So are mortgage rates and 10-year Treasury bond yield rates the same? Not quite.
Treasury bonds are seen as safer investments than mortgages (or securitized packages of mortgages) because the risk that the U.S. federal government will default on Treasury bonds is considered to be nil. For that reason, rates on mortgages are generally higher than the yields on 10-year Treasury bonds. For investors to take on the risk of investing in mortgages, higher rates have to act as an enticement. Rates on mortgages are therefore consistently higher than Treasury yields, though the two numbers are related.
Are Mortgage Rates Rising?
Since the election of President Trump, yields on 10-year Treasury bonds have risen, as have mortgage rates. So far, the market has responded positively to the new administration. That has led bond yields to rise, and mortgage rates have risen alongside them. However, the movement in rates has so far been modest, and the average rate on a 30-year mortgage is still under 4%.
What About the Fed?
Another factor that can lead to an increase in rates is action by the Federal Reserve. If the Fed decides to raise the Federal Funds Rate, mortgage rates will rise, too. That rate has been low since the Recession, and mortgage rates have been consistently low as well. But as our economy grows, the Fed is expected to raise the rate.
Reacting to Rising Rates
If you think rates are likely to rise by an amount that will price you out of the mortgage market, you might want to accelerate your home buying process now, before you feel the effects of higher rates. The same goes for refinancing. If you can afford to refinance now and you’ve calculated that refinancing will save you money, it might make sense to take the plunge before rates increase further. If, on the other hand, you’re planning to sell your home, you might want to consider putting it on the market before higher mortgage rates price potential buyers out of the market.
If you’re a millennial, you probably think that the low interest rates we’ve had in the last decade or so are the norm. In fact, recent rates are unusually low, so a rate hike isn’t a reason to panic. If you’re planning to buy or sell a home this year, you might want to take potential rate changes into account when you’re deciding on timing.