Normally, as the yield on the 10-year Treasury note drops, mortgage interest rates track that decline trajectory closely [Source: The Balance / St. Louis Fed]. However, in the current environment, interest rates on mortgages are not falling as quickly or deeply as would normally be expected. They remain stubbornly high in comparison to Treasury notes, and some mortgage interest rates are not at all in sync with Treasury note yields.
Why? The following four factors explain this phenomenon and what it means for those considering refinancing or purchasing a home.
- Because mortgage interest rates typically follow Treasury note rates, and with those rates falling recently, mortgage interest rates are indeed decreasing. However, they are not declining as much as the Treasury note rates. One of the reasons is that financial institutions are struggling to keep up with large volumes of refinance applications, along with the financing of new home purchases. In essence, lenders can’t keep up with demand. Additionally, refinances are taking longer for some borrowers.“Our experience at Cresset is that borrowers who are experiencing longer processing times are those with income primarily from non-W2 sources, such as non-salaried wages or income from capital gains or in the form of distributions,” said Jennifer Miara, Director of Banking and Credit Consulting at Cresset. “We are also getting questions about process times for those under shelter-in-place directives regarding the ability to get appraisals and schedule closings.”
- Historically, interest rates for conforming mortgages (home loans less than $510,400 beginning in 2020 [Source: Federal Finance Housing Agency]) have been higher [Source: CoreLogic] than jumbo mortgages (loan sizes over $510,400). However, interest rates on 5/1 adjustable-ratemortgages (ARM), which are 30-year mortgages with interest rates that are locked for the first five years and then adjust annually every year thereafter, are currently lower for conforming mortgages than for 5/1 ARM jumbo mortgages, which is not typical [Source: Schwab].
- Typically, interest rates on ARM mortgages are lower than a 30-year fixed rate mortgage [Source: The Motley Fool]. That is because the interest rate on an ARM is locked for only a certain number of years of a mortgage, not all 30 years. In addition, the shorter the length of time of an ARM, the lower the interest rate… under normal circumstances. From Cresset’s review of several lending partners, 5/1 and 7/1 ARM mortgages are currently priced the same at some lenders, when historically the 5/1 ARM mortgage has been cheaper [Source: Schwab]. For conforming loan amounts, 7/1 ARMs are now more expensive than 10/1 ARMs at some lenders [Source: Schwab].“The 10/1 ARM can be seen as the more attractive product given the interest rate difference is only slightly higher than the 5/1 ARM, plus borrowers receive five more years of interest rate protection,” Miara said. “In addition, those who have significant deposits or assets under management at their current financial institutions (usually $250,000 – $1 million) can often qualify for discounted rates compared to published rates, which can make refinancing more attractive.”
- Mortgage interest rates are changing quickly, often on a daily basis, at many lenders. A rate quote a borrower receives one day can change before that rate is locked in. Mortgage interest rates are also influenced by borrower credit scores and loan-to-home-value size, so a published interest rate is not always what a borrower will qualify for.“What this all means is that borrowers who are interested in refinancing should reach out to their financial advisors to find out what rates they qualify for and be prepared to lock in a favorable rate while it’s available” Miara said. “Plus, certain lenders Cresset works with will match interest rates if they are provided with a competitive quote from another lender.”