Link between mortgage rates, virus explained

It does seem puzzling that the direction of mortgage rates in the U.S. might be tied to something as seemingly unrelated as the worldwide coronavirus outbreak.

The other day, members of the Federal Reserve said the coronavirus “emerged as a new risk to the global growth outlook,” according to minutes released by the agency. And Treasuries are backing up that sentiment, as the 30-year bond yield tumbled past historic lows to 1.93 percent this week, 2 basis points lower than the all-time low of 1.95 percent. Meanwhile, the 10-year Treasury fell 3 basis points to 1.49 percent, hitting its lowest point since last September.

Worries about the economy do indeed impact the interest rates consumers pay. Sparked by an upsurge of cases in South Korea, renewed fears of the coronavirus (COVID-19), has investors retreating to safe-haven bonds, and that will help mortgage rates stay low.

“The falling yield on the 30-year Treasury bond is reflective of the concerns about the impact of coronavirus on the U.S. and global economies, however, the 30-year bond doesn’t directly affect mortgage rates,” says Greg McBride, CFA, Bankrate chief financial analyst. “Instead, look to the 10-year Treasury note, where the yield has fallen below the 1.5 percent threshold and is drawing closer to the all-time low of 1.37 percent.”

How mortgage rates tumbled

The first case of COVID-19 was detected on Dec. 31, and two days later the 30-year fixed-rate fell from 3.9 to 3.86 percent. Rates have been mostly declining since, falling to 3.75 percent as of Thursday.

“Anything that raises the specter of slower economic growth or produces a flight to quality in financial markets tends to be good news for mortgage rates,” McBride says.

How does this affect mortgage, refinance and home equity borrowers?

Now is a great time for mortgage shopping, as average rates for 30-year and 15-year fixed-rate mortgages as well as 5/1 ARMs sit comfortably below the 4 percent mark.

Eligible borrowers who choose to go with higher payments, but significantly lower interest rates can get a 15-year fixed-rate mortgage for about 3.08 percent compared with a 30-year fixed-rate mortgage at 3.75 percent.

The difference in the total cost of the loan is major. Let’s look at how much a $300,000 mortgage with a 15-year versus 30-year fixed rate costs:

• 15-year mortgage at 3.08 percent: monthly payments are $2,083 and total cost of the loan is $374,996.

• 30-year mortgage at 3.75 percent: monthly payments are $1,389 and total cost of the loan is $500,166.

In this example, both the monthly payments and total cost bear a wide gap. For folks who plan on staying in their home long-term and can afford the higher monthly payments, the 15-year mortgage can save them $125,170 in interest over the loan term. Those who will likely move within a few years might want to save the extra money each month and take on the higher interest rate cost.

Finally, if you currently have an adjustable rate mortgage, you’re likely enjoying the dip in rates, which is giving you a break in monthly payments. However, don’t count on rates staying low. As the coronavirus showed, there are always wild cards, so trying to predict mortgage rates can end up costing you money later.

ARM borrowers might want to lock in a rate now by refinancing into a fixed-rate mortgage, while we’re still below 4 percent.

“If you plan to still be in the home at the point your adjustable mortgage resets, then refinancing into a fixed rate now is a compelling trade.”