The Seesaw World of Mortgage Rates, Stocks and Bonds

If you’re like most people, you really don’t pay much attention to Wall Street on a daily basis. Sure, you’ll check your 401(k) when you statement comes in and peek at your IRA but in general, Wall Street is left for the so-called “experts” who buy and sell stocks every single day. But as you’re obviously very well aware, stocks can go up and stocks can go down. Stock pickers and institutional investors pay close attention to Wall Street machinations in an attempt to buy low and sell for more. It’s a risk to be sure but there are varying degrees of risk with stocks.

“Blue Chip” stocks are those issued by long-held companies that carry less risk compared to other choices. Blue chip companies have solidified their presence in corporate America and have been in that position for years. Typically, money flowing into blue chip stocks are much less volatile than say investing in a startup at the next IPO. Still, there’s risk involved. But the prospects of swinging for the fences and hitting a home run is the allure for many stock traders. Stocks can go up, stay the same for a while and then go down. It’s definitely a seesaw ride.

Bonds on the other hand offer a different kind of enticement. Bonds pay very little in yield but what they do provide what stocks do not is safety. A bond guarantees the purchaser with a return, something that stocks will not and can not do. In return for that safety, a bond won’t lose money for the investor. A bond works inversely with its price. As the price for a bond goes up, the yield for that bond goes down. What causes the price of a bond to go up or down?

Just like with most any other item in this country with a price tag, the answer is demand. If demand for something is high, the seller can command a higher price. If there is a demand for safety in the world of investing, bonds will be high on the list. If investors get week-kneed, money will pull out of stocks and back into bonds. Investors won’t make as much money, but they certainly won’t lose any more.

So, what do all these ups and downs mean for mortgage rates? Plenty. Fixed rate loans today are priced against a fixed index. For example, a typical 30 year fixed-rate conforming loan can be tied directly to a specific bond, like the FNMA 30-yr 3.0 bond. 15 year fixed rate loans also have their own indices. As investors adjust their portfolios to pull more funds out of a volatile stock market and into the safe hands of bonds, that places a lot of price pressure on those bonds. Hence, as prices rise for a bond, the yield goes down. That yield is tied to mortgage rates. This is why when the economy is a little wobbly, there will be an increased demand for bonds. So much so that rates will in turn drop.

Adjustable rate mortgages are also benefitting from recent rallies. Adjustable rate mortgages, or ARMs, are also tied to a specific index. To arrive at a rate for an ARM, the index is then added to a margin. A common margin is 2.25%. An ARM might be tied to the 10-year Treasury for example. If the rate for the 10-year was 1.50% and the margin 2.25%, the fully indexed rate would be 3.75% and remain there until the time for the next adjustment. Most ARMs today are in the form of a “hybrid” which is an ARM that is fixed for a predetermined period before turning into a mortgage that can adjust once every six months or a year, depending upon the program.

Freddie Mac releases its weekly national mortgage rate survey and last Thursday reported the 30-year average hit a 50 year low. All this means is that if you’ve thought about refinancing some time ago but haven’t paid much attention to it lately because rates weren’t quite there yet for your situation, it might very well be time to take another look. A drop in rates also means a boost to your buying power. Lower rates help out with higher loan amounts.

All of this spells out the fact that if you’ve been thinking of refinancing, now is the time. And if you’re looking to buy and finance a home, there better not be a better opportunity than in the current rate environment.