Business & Finance home loan mortgage.
Buying a home has long been considered the American Dream. With the reopening of America, interest rates have been rising, making it a little more expensive to finance that dream. Whether you’re buying, selling, or refinancing, this trend will have an impact on your cost of borrowing or plans to sell. Let’s talk about where mortgage rates are headed and why.
Mortgage Rates and the Yield on 10-Year Treasury
Mortgage rates have a strong tendency to follow the yield on the 10-year U.S. Treasury. While there have been brief periods when mortgage rates have bucked this trend, since 1979, there has been a 90.1% correlation between the two. To explain, the correlation scale ranges from -100 to +100 where a correlation of 100% means they followed each other 100% of the time. Thus, a correlation of 90.1% indicates a strong connection between the two. Why is it so high? Because most folks don’t hold a mortgage for the entire period. They might refinance, sell, or accelerate their payments, all of which shortens the duration of the initial loan. The following chart shows the average rate of a 30-year mortgage and the yield on the 10-year U.S. Treasury since December 1979. Notice how closely they follow each other.
Yield on 10-year U.S. Treasury and 30-year mortgage.
Also note how the treasury yield has risen recently and the 30-year mortgage rate is beginning to follow. Even though rates remain well below their long-term average the recent uptick has increased the cost of borrowing. How much house can you afford to buy? If you’re planning to finance the purchase of a home, higher borrowing costs reduces the price of the home you can afford. This affects all involved, including those looking to buy and those looking to sell.
Future Rates: Higher or Lower?
Even though mortgage rates have been rising recently, higher rates are not a sure thing, at least not in the short term. Several states have eliminated their mask mandate, and many are reopening or increasing the allowable capacity for restaurants, bars, and other businesses. Additionally, many folks have a strong case of corona-fatigue and are extremely eager to get back to normal. These issues bode well for strong economic rebound and higher interest rates, including mortgages. On the flip side is the virus. Will the relaxed Covid-19 measures contribute to another surge in cases? Will the vaccine deployment inoculate enough people to avoid a material rise in infections? At this point, it’s a race between reopening the economy and the vaccine. We’ll have to wait and see which side wins.
I am President of Integrity Wealth Management, Inc. an independent, “fee-only,” Registered Investment Advisory firm, which I started in 2007. My writing career began with