You may have already read the headlines. Things like Trump-fueled Treasury surge and the so-called Trump Effect, all driving mortgage rates higher.
And it’s not just fodder, it’s true. Since the election results came in last Tuesday night, mortgage rates have been on an upward tear, which clearly isn’t good news for those looking to secure a mortgage.
Of course, it’s been great for anyone with an investment account because stocks have surged during the same period. It may also be a boon for savers if depositories eventually raise the interest rates they pay out. Something above 1% would be nice…
The crappy part is that the recent jump could affect new homeowners for the next 30 years if they have to go with a higher rate today and things don’t improve anytime thereafter.
Why Are Mortgage Rates Higher with a President Trump?
- Start with the basics
- A strong economy leads to higher interest rates as a means to cool inflation
- Everyone expects an economic boost under Trump
- So with that there are expectations of higher mortgage rates
Put simply, mortgage rates tend to go up when the economy improves. The basic premise is a stronger economy means more inflation, which calls for higher interest rates to keep things in check.
When news broke of Trump winning, stock futures actually plummeted because there was a lot of uncertainty of what a Trump presidency would mean for America.
That uncertainty meant an expected stock selloff the next morning, which would have translated to lots of bond buying. Investors put money into bonds when there’s fear in the market because they’re reliable investments (albeit low paying and boring), unlike stocks.
It would have meant lower mortgage rates too because higher bond prices (up because of increased demand) mean lower yields (rates).
But then something strange happened overnight and the stock market opened markedly higher. The basic gist is that everyone apparently realized a Trump presidency would mean a more robust economy with looser regulations and more business-friendly policy.
The picture completely changed and we’ve had a stock market rally pretty much every day since he was announced as the winner.
Conversely, a Hillary Clinton win would likely have meant more financial regulations, or at the least no repeal of Dodd-Frank or anything else that’s already in place.
My assumption is that would have meant more of the same and no major market shakeup since her policies probably aligned with current administration.
Now we’ve got a businessman as our President-elect so the theory is a stronger economy and with that higher interest rates.
Long story short, mortgage rates are higher than they were last week, and significantly so.
Kiss Your 3% Mortgage Goodbye?
- That rock-bottom mortgage rate might be gone forever
- But rates are still going to be very attractive for at least the next couple years
- When looked at on a historical basis
- And your monthly payment may not even be that much different
The average 30-year fixed mortgage rate might be closer to 4% today compared to something like 3.625% pre-election.
On a $250,000 loan amount, we’re talking about a mortgage payment of $1194 versus $1140. That’s another $54 a month and roughly $650 annually. Ouch!
It’s not the end of the world per se, but it is a sizable jump and enough to change a lot of things for a lot of people.
For one, it could make a home unaffordable to someone on the cusp of approval simply because of DTI constraints.
Secondly, it could turn the decision to refinance on its head. A difference in rate of 0.25% to 0.375% is plenty enough to kill the deal, so to speak.
And rates could rise even more in the short-term, pushing you out of the 3% realm and into a very scary and unfamiliar 4% mortgage. I say that jokingly because there was a time not very long ago when a 4% mortgage would have been unheard of (in a good way).
Let’s face it, we had to come to grips with a rate rise, although it’s kind of ironic to see it come this way, from a presidential election, something perhaps few saw coming.
Hold On a Minute
- Sure, mortgage rates might begin an upward march
- Assuming the pundits are right about Trump
- But the U.S. economy is still at the mercy of the world stage
- And plenty can play out to change the direction of rates over coming months and years
But wait, this might not be the end of the story. Mortgage rates fluctuate all the time. They can shoot up at a moment’s notice thanks to some geopolitical issue or economic concern (or presidential election), but they don’t often move in one direction and never look back, just like the stock market.
We’ve seen similar instances in the recent past, and often the story changed quickly. Everyone expected a huge move after Brexit, but the result was fairly muted once the dust settled.
This Trump presidency still has a lot more questions than answers, and is mostly speculation rather than fact.
That could spell a mortgage rate reversal before most homeowners even notice a difference. Sure, it could be terrible timing for some people who have to lock and close their loans, but if you can wait, it might make sense to.
Yes, mortgage rates can surely continue to rise in the near-term, but there’s nothing to say they won’t trickle back down to levels seen a week or two ago.
For me, this certainly isn’t a done deal based on uncertainty alone! Remember, Donald Trump was seen as very uncertain before he became President-elect. So to think it’s now all figured out a week later is crazy.
Declaring low mortgage rates gone forever would be a huge blunder in my mind. We’ve made this mistake numerous times in the past few years and there’s little reason to think it couldn’t happen again.