INTEREST RATE TWIST
Long-term fixed-rate mortgage (FRM) rates went down again this week, dropping from an average of 3.6% to 3.55% for a 30-year FRM according to Freddie Mac.
Typically, the 30-year fixed-rate mortgage will carry your highest interest rate because it is fixed at that rate for 30 years therefore it carries less volatility to the borrower than an adjustable-rate mortgage (ARM). For an ARM, you pay a fixed rate for the first few years of the loan and at a certain point your rate will go up or down depending on the market. That carries more interest rate risk for the borrower as the rate could change over time. Because the fixed-rate portion of an ARM is much shorter (5, 7 or 10 years), the rate is typically lower than a 30-year mortgage rate.
When the yield curve inverted last week, it caused a disruption in the mortgage world. Briefly, according to Bankrate.com, there was also an inversion of mortgage rates as the ARM rate actually went higher than that of the long-term FRM.
Keep in mind that the composite rate scenarios from Bankrate.com are an average and the ARM market is a very small component of the mortgage industry right now (6% of total mortgage application volume according to the Mortgage Bankers Association). Even still, we are seeing a very flat yield curve between the two kinds of rates which is rare. Freddie Mac’s average 5/1 ARM rate is 3.32%, not far off from the 3.55% 30-year FRM.
Because of these low rates, refinances are at a three-year high right now. The only drop in activity came purely from the purchase market according to the Mortgage Bankers Association. The MBA data showed that 63% of applications that came in over the last week were for refinances. Freddie Mac’s data shows that homeowners who refinanced in Q2 of 2019 will save an average of $1,700 per year or around $140 per month.
The MBA makes an interesting point about the drop in the purchase market, suggesting that perhaps mortgage companies are so overwhelmed with refinances they are simply putting more resources where the activity is in refis and falling short on purchases. Movement Mortgage’s record-breaking numbers from July contradict that sentiment, as nearly 80% of the $1.7 billion in funded loans were purchase loans.
Home purchases are continuing to be stymied by lack of inventory. According to First American’s Potential Homes Sales model, people are quite simply staying in their homes longer. Year-over-year from July 2018 to July 2019, American’s tenure length increased by 11%. That equates to almost 425,000 lost home sales. But, analysts see these lower mortgage rates as an incentive for folks to tap the equity in their homes and make a move to a larger home which might free up more inventory.
****Courtesy of: Movement Mortgage
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The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement’s staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.