The rate on 10-year bonds issued by the U.S. government keeps climbing, a reversal that seems all but certain to push mortgage rates higher. The 10-year Treasury is closely tied to 30-year mortgage rates, which have been climbing from the record lows of recent months.
The rate on 10-year Treasury bonds reached a new post-pandemic high. Last week, the rate topped 1.3 percent for the first time since February 2020. The surge reflects investor optimism about coronavirus vaccines and about Democrats’ proposed new round of economy-boosting stimulus.
The sustained rise in 10-year Treasurys means homeowners who have been considering a refinance should pull the trigger now, says Greg McBride, Bankrate’s chief financial analyst.
“If you’ve been procrastinating on refinancing, wait no longer,” McBride says. “Every bit that mortgage rates move up takes away some of your potential savings.”
A roller coaster ride for Treasury rates: Why they matter
Most consumers pay little attention to 10-year Treasury notes, but the rate on the benchmark bond directly affects how much you pay for your mortgage. The 10-year Treasury acts as a reliable indicator of economic sentiment and as a key benchmark for mortgage rates. In 2019, the gap between the 10-year Treasury and the 30-year mortgage averaged 1.79 points, according to a Bankrate analysis of data compiled by the Federal Reserve Bank of St. Louis.
In late 2019, the rate on the 10-year Treasury was north of 1.9 percent. Then the coronavirus pandemic hit, and rates on 10-year bonds plummeted. The 10-year rate fell as low as 0.52 percent in August.
If the split between Treasury rates and mortgage rates had remained at last year’s levels, the 30-year mortgage rate would have plunged below 2.5 percent this year.
That’s not what happened. As the coronavirus shook the U.S. economy, the divide widened to as much as 2.72 points.
However, 10-year Treasury rates have recovered since then, buoyed by an improving labor market, a smoother-than-expected presidential election and promising news about a coronavirus vaccine.
Rising yields on government bonds reflect new optimism about the U.S. economy. But the trend could bring unwelcome news for mortgage borrowers: Higher rates on 10-year Treasury notes generally mean rising rates for 30-year mortgages.
The correlation isn’t a perfect one, of course. Mortgage rates continued to fall, setting new records in late December even as the 10-year Treasury rebounded. But now that the spread between Treasury rates and mortgage rates has returned to normal, rising Treasury rates could translate more directly to mortgage rates.
What you can do to secure a smooth refinance
Considering a mortgage refinance? While there’s no guarantee about the future direction of rates, the latest economic headlines seem to indicate that they won’t fall much further. Here are a few ways you can make the refi process as profitable as possible:
- Shop around: Rates and closing costs vary widely by lender, so get multiple bids. Closing costs can range from as little as 2 percent to as much as 5 percent of the amount of the loan.
- Get your paperwork in order: Don’t let something simple like a missing document delay your refinance. Collect PDFs of financial documents — including pay stubs, bank statements, tax returns and retirement accounts.
- Ask about rate locks: Lenders typically extend rate locks for 30 to 60 days, meaning you won’t have to pay more if rates go up before your loan closes. These aren’t normal times, though, and many refinances aren’t closing within 30 to 60 days, so make sure your lender is willing to extend your rate lock if your deal is delayed.
- Keep your credit score tight: Now isn’t the time to miss a payment, take on new debt or otherwise do anything to lower your credit score. Lenders are being especially strict about borrowers’ credit histories.