Advice for Savvy Retirement Planning

Have Mortgage Rates Bottomed?


If you are like many homeowners, you have likely refinanced your mortgage once (or multiple times) in the past several years. With rates at historic lows, it has been an absolutely wonderful time to lock in lower rates. It’s also quite likely that shortly after you refinanced (or initially financed a purchase), mortgage rates continued to go down.

Well, now may be the time, if you have been waiting for the “perfect” opportunity to refinance, to pull the trigger. After a historic drop in rates – a run which started roughly in 1981, and has not waivered in its descent, save for a few bumps along the way – we have now seen five straight sessions of higher rates. Without getting into the nuts and bolts of economic indicators, it is safe to say that the proverbial planets may now all be in alignment, signaling higher rates to follow. This week saw the first point in nearly four months where the benchmark 30-year mortgage rate closed above 4.0 pct.  A month ago, it touched 3.87 percent, the lowest mark since long-term mortgages began in the 1950’s.

Mortgage Rates

Many people mistakenly believe that the Fed activity (Federal Reserve) is what dictates mortgage rates. However, the rates set by the Fed typically only have a direct impact on short-term lending and borrowing rates, such as Money Markets, bank CD’s, savings accounts, and other similar products. This is primarily because the rates that are set by the Fed only dictate the rate that banks pay to borrow from one another to maintain adequate capital, and invest excess cash. So when Ben Bernanke and friends decide during their Federal Open Market Committee meetings to keep the Fed Funds rate near zero, banks earn virtually no interest on overnight lending, and thus will not pay higher rates of interest to depositors.

Let’s look at how mortgage rates really work. There are three primary drivers of mortgage rates: the yield on the 10-year Treasury, investor’s risk premium, and supply/demand pressures.

10-Year Treasury

Change in Yield on 10-year Treasury is one of the best indicators for mortgage rates. Typically, mortgages are paid off or refinanced around the 10th year and that makes the 10-year Treasury a comparable benchmark. Inflation is also a major factor in mortgage rates, however, inflation is already factored into the yield of the 10-year Treasury, thus indirectly impacting rates. Mortgage rates will move in the same direction as the yield on the 10-year Treasury, though they may not move by the same percentage change every time.

Investor’s Risk Premium

The mortgage industry is fueled by investors buying mortgage-backed securities. Most mortgage loans are sold to Fannie Mae or Freddic Mac, repackaged, and sold to investors. Those investors demand a “risk premium” – essentially, some additional return for the risk of default on their invested capital. Generally, the Risk Premium has floated in the 1.5 – 2.25% range.

Supply/Demand Pressures

During good economic times, the supply of mortgage borrowers will typically rise, while at the same time, invesors’ money is fleeing to competing investments, typically the stock market, with prospects of greater returns. Whenever supply overwhelms demand, the price is forced lower and in the case of mortgage-backed securities, the yield or mortgage rate must be higher to adjust to the imbalance, as yield and price move in opposite directions. By the same token, mortgage rates tend to be lower in bad economic times as supply and demand are in a reversed imbalance.

Putting It All Together

With the 10-year Treasury on the rise, and the perception of improving stock and real estate markets, this has put upward pressure on mortgage rates. But, as we have seen for several years, nothing is certain in this topsy-turvy market. There have been many cases of a pause-and-reversal in mortgage rates, only to see the market continue its downward trajectory. I guess we can say “this time might be different”. At all-time historic lows, this may be the most opportune time to review your mortgage rate or lock-in on that house you’ve been looking to buy, while the going is good.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or You can also view his personal finance blog at and the firm’s website at

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