If you're at all a follower or observer of international headlines, you'll agree that that global unrest is increasing:
-- The pall of a Russian invasion is hanging over Ukraine.
-- The Islamic State in Syria and Iraq, better known as ISIS, is sweeping across Syria and northern Iraq, posing a higher threat to global security and U.S. counterterrorism efforts.
-- The Israel-Gaza conflict is threatening to further destabilize the Middle East.
-- The Eurozone recovery is stalling, with the economies of both Germany and Italy both retracting in the second quarter of 2014.
Yet, if you're currently shopping for a mortgage, you might greet this most recent flare-up of geopolitical events as good news, even great news! Global unrest and heightening world tensions can help lower the cost of your next mortgage. That's because whenever investors, both here and abroad, perceive that global disorder is on the rise, they seek safer havens for their money, such as U.S. Treasury Bonds. This flight to safety means the U.S. government has to pay less interest to attract investors, resulting in lower interest rates for borrowers who want to buy cars and new homes.
Similarly, mortgage-backed securities (MBS) often track the direction of U.S. Treasuries. This is vital information to home shoppers because mortgage-backed securities are the bonds that most directly influence mortgage rates.
A world on the edge improves pricing for mortgage borrowers
Last Friday (Aug. 15, 2014) when the saber-rattling between Russian and Ukraine ratcheted up, yields on U.S. Treasuries fell to 4.125 percent, the lowest rate in two months. The yields on mortgage-backed securities mirrored this movement to a lesser extent.
Indeed, just a lowering of a few basis points over the life of a 30-year-fixed rate mortgage can mean thousands of dollars in additional savings for borrowers. Run your own scenarios in our mortgage calculator to see how you would fare after any movement in rates.
Knowing how just a few ticks either way on the interest scale can influence your mortgage payments for decades -- the question invariably becomes, how do you as a potential borrower and home buyer play it? Do you cheer for more world chaos, hoping mortgage rates will sink even further, perhaps touching Nov. 21, 2012's 3.31 percent level, the lowest mortgage rate ever for a 30-year fixed-rate mortgage, or do you play it a little closer to the vest and lock in today's rate quoted by your lender?
What's your crystal ball telling you?
"There are a couple of things to consider," said Ted Rood, a national lender based in St. Louis, Mo. "First, you want to deal with a mortgage originator who is tracking real-time pricing, so ask your lender if he subscribes to MBS Live or some other such service. That way, he can give you real-time quotes and give you a sense of which direction prices are trending.
"Second, the borrower should know what his appetite for risk is. When volatility spikes, risk and opportunity are both magnified, so you have to know what your risk tolerance level is."
Interestingly, weekends only intensify the rate lock or float dilemma. A lot can happen in 48 hours when U.S. financial markets are closed on Saturday and Sunday. The world keeps spinning, and sometimes global events can spin out of control.
"I tend to be a little conservative and lean toward locking rates on a Friday because I hate to be the bearer of bad news on a Monday, informing my client that rates shot back up due to some new crisis."
And rates sometimes can up go up sharply (bad for borrowers) as a result of world events calming down or stepping back from the brink. In other words, what's good for the world might not so good for you, if you're looking for a low mortgage rate.
"A couple of years, I remember rates repricing three times in a few short hours," Rood recalled. "I quoted a price to my client who said he would get back to me. When he did, the full price of the loan -- not the percentage rate -- went up by more than a percent.
"Imagine what could happen if you put off your decision until you come back from a week's vacation!"
How rates normally behave
When the world isn't such a powder keg, interest rates (the cost of borrowing money or the amount the lender wants) more closely follow the law of supply and demand here in the United States. Typically, an increase in the demand for credit will raise rates while less demand will reduce interest rates.
Similarly, inflation, due to higher prices for goods and services and the wages paid to produce those goods and services, also affects interest rates. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher rates as compensation for the decrease in purchasing power of the money with which they'll be repaid.
Lastly, the government and the Federal Reserve, in particular, can largely influence the flow of money and access to credit through its monetary policy, such as buying (easing) U.S. treasuries and mortgage-backed securities to lower interest rates or selling (tightening) the same instruments to raise rates. The government can also adjust the federal funds rate, the rates that banks typically charge one another for short-term loans, to further tighten or relax credit.
At the start of 2014, most analysts predicted that the demand for credit and inflationary pressures would coincide with a rebounding economy and an improving employment recovery. Interest rates, a consensus of economists suggested, were headed toward 4.5 percent, if not higher.
Strangely, outside of 200,000-plus payroll gains for several consecutive months -- a long-awaited and much-needed stimulus for the economy -- interest rates have retreated. Inflation has been held in check and the government's monetary policy has been well telegraphed, leaving financial markets little to complain about.
What the smart money had forgotten to account for was just how much mayhem there is in the world and how immersed and intertwined the United States is in all of it.
For home loan borrowers watching the world stage, a global disaster a day keeps higher interest rates at bay.
And if you're really lucky, given last's week's world events, you might even see rates dip further.