The unemployment rate unexpectedly dropped to 13.3 percent in May from 14.7 percent in April, the Labor Department reported Friday. That news helped to push the 10-year Treasury yield higher. Mortgage rates ticked up as well, though they have since fallen back. The 30-year fixed mortgage rate loosely follows yields on the 10-year Treasury note.
But despite the recent increase, mortgage rates may remain fairly steady through 2020.
“Our forecast is still for rates to stay pretty flat this year, maybe with a slight increase,” says Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association. The MBA forecasts that rates will stay in the 3.4 percent range through 2020.
Currently, the average rate on a 30-year, fixed-rate mortgage fell to 3.47 percent in Bankrate’s latest weekly survey.
Why mortgage rates could remain flat
The 10-year Treasury is a key benchmark for 30-year mortgage rates. The two generally move in the same direction — if the 10-year Treasury rate moves up, so does the 30-year mortgage rate.
On top of the 10-year Treasury rate, banks add what’s called a spread. It helps to cover operating costs and allows lenders to make a profit so they can continue to operate and fund loans.
The spread is often 1.8 basis points, according to experts. Lately, however, the spread has been abnormally high — as high as 2.72 points.
Kan says one of the potential reasons it’s stayed elevated is because lenders are currently saturated with loans, and they don’t want a lot of new ones to come in. It could also be due to the increased risk lenders take on with high or rising unemployment. Keeping the spread high is one way to guard against that risk.
Due to the high spread, even if the 10-year Treasury rate does move up, mortgage rates might only move up a little or could remain at the same levels, says Kan.
In fact, there’s a chance mortgage rates may even fall due to decreased activity in the market.
“If activity does slow as rates come up, then we might see lenders start to move rates down to bring additional borrowers back in,” says Kan.
What to do as a borrower right now
Mortgage rates have been at some of the lowest levels in history in recent weeks. Even with a slight increase, they’re still at near historically low levels. For many homebuyers and refinancers, now is a good time to lock in a rate. Just make sure to shop around thoroughly before you decide on a lender.
Keep in mind that getting a low rate is just one part of the homebuying process. In many markets, the purchasing process is competitive. You might face a bidding war.
“Work with the lender to make sure you can get that loan closed quickly enough on the transaction — you don’t want to get outbid,” Kan says.