Why Mortgage Rates Don’t Drop As Quickly As Treasury Yields

You know how you see oil prices drop precipitously on the news, yet when you get the gas station to save some money, you're disappointed because gas prices haven't gotten much cheaper?

The same thing happens with US Treasury yields (oil) and mortgage interest rates (gas). Mortgage rates are largely influenced by the latest 10-year U.S. Treasury bond yield and will move in the same direction. However, given there are so many different types of mortgages and frictions, mortgage rates won't necessarily change by the same magnitude.

The coronavirus-induced market meltdown sent US Treasury bond yields tumbling to all-time lows. But now, thanks to tremendous inflation, mortgage rates are at the highest levels since 2012.

So why don't mortgage rates move as quickly as US Treasury yields? Let me explain.

Why Mortgage Rates Aren't Falling As Fast As US Treasury Yields

Mortgage rates are not falling as fast as Treasury yields due to one main reason: risk.

It's not risk, by you, the borrower who can't wait to refinance their mortgage to save money and improve their monthly cash flow. The risk is felt by INVESTORS of mortgage-backed bonds (MBS), who pay a premium for those bonds and expect to recoup that and more over time, through monthly interest payments from borrowers. Most big lenders package their loans and resell them for income and risk-reduction purposes.

But here's the thing. As the homeowner paying the mortgage, you will logically want to PAY DOWN your mortgage faster or refinance your mortgage if you see mortgage interest rates drop. As a result, the MBS investor who paid a premium for your mortgage in hopes of earning higher interest payments for a very long time loses because the premium shrinks or the mortgage is refinanced.

Such an investor is like the homeowner who decides to pay points when refinancing their mortgage to get a lower rate, but who ends up selling the home or paying off the mortgage before its breakeven point. This risk of selling your home sooner than expected is why I prefer a “no-cost refinance.”

If you have the time and patience, you should always do a no-cost refinance if the new mortgage rate is lower.

Example Of Why Mortgage Rates Aren't Dropping As Quickly As Treasury Yields

Long ago, I got a notice in the mail that my Citibank, 30-year fixed mortgage at 4.625% was being sold to some other lender. This was before I developed a strong preference for adjustable rate mortgages.

To make things easier for me to pay the new lender (which is important for the buyer of my mortgage), they gave me instructions on how to cancel my autopay and set up a new one with the new bank. What a pain! But I had to do it because I didn't want to be late or go into default.

The new lender gave me a 90-day heads up to swap over the autopay, again, to reduce the friction. I spent some time changing my setup and thought I was done with things for a while.

The investor of my loan was expecting to earn a nice 4.625% interest rate from me for ideally the 28 years left on the amortization schedule. I'm sure the borrower paid a slight premium for my mortgage given I never missed a payment, I had a 780 credit score, and a 4.625% interest rate was attractive because mortgage rates were falling.

Only about eight months into paying my new bank, I decided to refinance the mortgage to a 5/1 ARM at 3.375%. The refinance took about three months to complete.

The higher the premium the purchaser paid for my 4.625% mortgage, the more the purchaser lost since it only got my higher interest for about 11 months. I ultimately ended up refinancing the mortgage again after five years at no cost down to 2.875% and then paid the entire mortgage off five years later.

Always Think From The Investor's Perspective

If you are ever confused about why things are the way they are in finance, always put yourself on the other side of the transaction. Putting yourself in someone else's shoes not only allows you to negotiate better and invest better, it also allows you to be a more empathetic person during conflict.

When rates fall fast, like they do during a terrorist attack, the start of a war, or a health pandemic, the risk of prepayment increases. As a result, mortgage-backed security investors want to pay a lower premium.

A refinance boom creates underperformance or losses for their existing book of mortgage-backed securities because more of them are getting paid off through refinancing. Therefore, investors are less willing to pay for mortgages.

Key point: As the premium investors are paying goes down, the price for borrowers goes up, slightly, in either up-front costs or higher interest rates. As a result, mortgage rates do not fall as much as Treasury yields.

Final Reason Why Mortgage Rates Don't Fall As Quickly

Although mortgage rates have fallen to 8-year lows, with the way things are going, I believe there is a ~90% chance mortgage rates across all durations will eventually fall to all-time lows like U.S. Treasury yields.

The reason why I don't think there's a 100% chance all mortgage rates fall to all-time lows is because banks, like gas stations make their own bets too. And some banks might just keep their mortgages rates higher on the expectation that Treasury yields will come back up so they can make greater profits.

But if they are wrong, they will probably lose a lot of refinance business to their competitors. Which means they will eventually have to lower their mortgage rates as well. to stay competitive.

Finally, some banks will keep their mortgage rates higher than their competitors simply because they are overrun with business. The lender just doesn't have enough personnel to handle all the new refinancing demand. Too much demand is partially why my last mortgage refinance took over four months to complete instead of their promised three months.

Just like how it's difficult to time the bottom of the stock market to purchase, it's hard to time the bottom of mortgage rates. But unlike with stocks, you know exactly how much money you will save by refinancing a mortgage over a certain period of time once you do the math. You got a bird in the hand.

Everybody with a mortgage needs to be having a conversation with a lender today. If you don't see rates going lower, keep on hunting for the lender that wants your business. Plenty have the staff and the desire to meet your demand!

Invest In Real Estate More Strategically

Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. 

The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding. 

Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. The real estate platform has over 300,000 investors and manages over $3 billion. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.

I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000. 

Shop Around For The Latest Mortgage Rates

Check the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you're getting the lowest rate for your situation. Further, you can make lenders compete for your business.

50 thoughts on “Why Mortgage Rates Don’t Drop As Quickly As Treasury Yields”

  1. I wanted to circle back here. I was offered 3.125% no-cost refinance on a 30 yr fixed. 0 points. Do we expect these to drop another 0.25-.5% this year?

      1. Current mortgage: 2.875% on a 5/1 ARM expiring Jan 2021. 300k loan balance. Lender wants to close this refi by Apr end.

        I’m shopping for a SFH (Sunnyvale area) so I thought I’d lock this now vs get stuck with investment property rates next year. I’m looking for a deal in 2Q20 (per your other post)

        You’re absolutely right -competition is intense here (SF Bay Area) despite the pandemic (SiP, no contractors working till May etc.) Agents are resisting my requests for rebates

        Your posts have really demystified the current investment landscape (RE, stocks, lending rates) for me. Thanks so much for what you do, Sam.

  2. Your explanations make a lot of sense, thanks! I’ve tried LendingTree before, which is OK. They are quite aggressive.

    Credible provided some good quotes and I am negotiating with my existing lender as well.

  3. Yea about this excess business situation and banks keeping rates up…
    I have seen the exact same things happening in this rate environment. The mortgage company rates are simply not budging as much as they should be considering the current historically low TB rates. This almost seem like banker collusion as the situation is being exploited at the expense of the borrower.

    Think about this for a second, the banks borrow money at 1% for 30 years and lend it out at 3.5% for the same amount of time. That’s a 250% markup on rates and simply seems excessive. Regardless these rates are very very low.

  4. After reading this article and your earlier ones about no cost refinancing, I’ve been considering a no codt refi. Since yesterday. I haven’t had time to shop for rates.

    I plan to be in my place for a very long time, which would generally make it better to do a regular refinance, I know. But I prefer to keep more cash on hand in case of unemployment (I do AML contract work) and don’t have a whole pile of cash to throw at closing costs. I have a 30 year fixed at 4.125% ($90,000 on a $120,000 purchase with a little less than $75,000 to go) that I got two years ago. I’ve been actively paying down additional principal every month and would like to have the same amount of money go to more principal. I wouldn’t normally consider refinancing under those circumstances, but I keep hearing about all these amazingly low rates. Even a paltry drop to 4% would save me $66 monthly with a total interest save of over $22,000 (less, though, since I’ll be paying off more principal). This makes it worth looking into in my eyes, but only if it’s no cost.

    What do you guys think?

    ARB–Angry Retail Banker

  5. Thank you for the post, Sam. Aptly timed. I actually started making calls the day the emergency rate drop happened and was surprised to learn nothing had changed, even 1-2 days out. What are your thought on refinanced jumbo loans when it comes to rates. It seems there is a difference and that jumbo loans have slightly higher rates (looking at websites like Bankrate)? Is this true in your experience?

  6. Just read an article that mortgage companies aren’t advertising the actual rates they can get you online because they are swamped. Unless you are speaking directly to a broker or lender… you can’t find the actual rates that are available online. Websites like bank rate.com and nerdwallet.com which were giving accurate rates from lenders a few weeks ago are now showing very few companies and /or fake inflated advertised rates. Rocket Mortgage just quoted my 800 plus credit score and $375K 15 year mortgage rate at 3.875%.. and 30 year fixed in the 4% range (FYI.. i closed a 20 year fixed at 3.29% end of Feb… no fees).

    1. Exactly this. I’m in underwriting on a 30yr fixed cash out out ($225k cash out) at 3.0%. That same company now is showing a 4.6% rate because they were so slammed, but I’m sure would drop rates if someone called to inquire.

      1. Ninja, are you using first republic? Nobody else is quoting 3% on cash out refi for me except them. But they want relationship banking and I have to keep 45k in their checking at all times.

  7. I closed my mortgage 3 months ago for a 2.5% on a 10/1 ARM. Two lenders are saying they can refi at 2.25% but if I wait a bit more, it could drop to 2.00-2.125%, all figures with no points (3/8th is a good rule of thumb to refi given payback would drop to 1 year).

    1. Great rate! 10 years is one of the ideal durations as well. Since you closed just three months ago, I would just wait. Even if you don’t refinance, I’d be happy with what you got.

      1. Yes. Interestingly the 5/1 and 7/1 ARM had higher yields than the 10/1, so it might be a yiele curve inversion for MBS…

    2. That’s an incredible rate! Please spill the beans on which lender? And is it because you had relationship pricing?

      1. Citibank (NY), with super prime credit, relationship pricing (read Sam’s articles on this!) and by making lenders compete (Citibank has policies to beat competitor rates to win more business).

        Not sure about now, given deluge of refi requests, MBS market liquidity issues.

        I would expect in the coming weeks rates to come back lower.

  8. Sam, I’m looking at at cash out refinance. My home is worth $1200000, we owe 452000, we’ve put money into our home and think I could refi to $750000 debt so cash out of $300K. But rates are way higher. Do you think they’ll come down after this surge? It used to be that jumbo mortgages were close to non-jumbo. I don’t know why lenders care about an arbitrary line in the sand. If the value is in the home, and I make enough to cover it, why should I be penalized? My plan is to by a small rental property with the cash plus savings.

    1. What is your existing rate?

      It is very hard to see mortgage rates getting any lower than right now. At the same time, I can see the S&P 500 correct by another 10%, which would lead mortgage rates to drop probably by another quarter of a percent. But that’s it in my opinion.

      1. I locked last week during the chaos. My rate on a 30yr fixed was 2.875%, but when they mentioned doing a $225k cash out only bumped the rate up to 3.0% decided that was a no brainer. Keep asking around and see if you can minimize the spread between rates on refi vs cash out like I did.

          1. Yeah I’ve been thinking about how to leverage that but can’t find anyone offering a more competitive rate than what I have. I’d expect to get a better deal since the ten yr is below 0.5 but can’t seem to get anyone to budge. Demand is artificially keeping prices high. I have up until three days after closing to back out if I can get a better rate.

  9. Just got 2.75% 30yr fixed, no cost. Streamline refinance with current lender, so all I had to do was some some paperwork. Not even a credit check!

    1. Great rate! Hard to beat a 2.75% rate on a 30-year fixed. Did you find out what a 5/1 ARM or 7/1 ARM were? I’m assuming the corresponding rate would be 2.25%, which is also tough to pass up.

      Can’t believe it’s gotten cheaper and cheaper to live after all these years while real estate continues to go up.

      1. I didn’t – I’m not sure it was an option considering the type of mortgage I had (VA loan)

  10. I have 232,500 balance on a 950K worth house. My broker is quoting me

    30yr fixed ranges from
    2.875% = 946 no points but costs to 3.25% with no cost = $1011

    15yr fixed ranges from
    2.375% = 1536 no points but costs to 2.875% with no cost = $1591

    7yr ARM
    2.375% = 903 no points but costs to 2.875% with no cost = $964

    I have a 30 yr at 3.375% and given that I did quite some prepayment at the start of the loan; I only have 15 more years left to pay.

    Wondering what I should be doing?

  11. Hi Sam,

    Last year I took an early retirement package that provided two years of pay. It was paid out in one lump sum last year. So I currently have zero earned income for this year. I was looking to refinance my vacation home which is at 4.25% for 30 years to 15 years below 3%.

    I spoke to my banker at Wells Fargo and he said I can qualify through an annuity formula despite having no income.

    Here is how it works. They take all of your retirement assets, 401ks and IRAs, multiplied them by 70%. This amount is then divided by the length of the mortgage. So for example $2M in retirements assets x 70% equals $1.4M. $1.4M/180 months equals $7,778 of monthly income. Next, they add your dividends and interests from non-qualified accounts. So if you have $300 a month dividends and interest add that to the $7,778 to get $8,078 of income. Note: Those collecting a pension or social security could add those income amounts too.

    Now they add the new mortgage payment for the vacation home, taxes, and insurance plus the mortgage payment, if any, taxes, and insurance on the primary residence. Lastly, they add any other debt payments like car loans, lease payments, credit card payments and so on. For example, let’s say this adds up to $3,500

    $3,500 / $8,078 = 43% As long as this percentage is below 45% you can qualify for refinancing. Some lenders will let you stretch to 50%.

    My actual numbers worked so I was able to refinance to the 15-year mortgage below 3% despite having zero earned income YTD.

    Note the shorter the mortgage the lower the denominator which drives more income. Income would have been cut in half for a 30-year mortgage which makes it harder to qualify despite the smaller mortgage payment for 30-year mortgages.

    I thought you and your readers may find this interesting.


    1. That is really good news to be able to refinance with no income. Do they call it “asset-based pricing”?

      What mortgage rate did you ultimately good for your vacation property?

      1. Hi Sam,

        The program is called Asset Depletion Mortgage and was recently expanded by Freddie Mac to help retirees qualify for mortgages. Note: You can only use 70% of retirement plan assets if you are over 59 1/2. Also, you don’t actually need to draw down on the assets. They are just used for calculation purposes.

        I got a rate of 2.875 on a second home. Saving $200,000 in interest costs by going to 15 from 30 years.

        Financial Dadvisor

  12. Just locked refi 2.625% 15yr, moved from 4.50% 30yr that I closed less than 1 yr ago. Grab this opportunity and don’t time the bottom-bottom, bird in hand better than one in the bush.

    1. Good move! I think I’m going to jump on this Monday too. What was your closing cost? I’m looking to borrow $350k with good 35%+ equity.thx

  13. I’ve been looking to refinance to 15 year under 3% for the last 2 weeks, but finding that closing costs are ridiculous (about $3500). I don’t have a big loan amount so break even is turning out to be about 24 months. Best I have found so far is 2.75% plus closing costs, I guess I’ll wait a few weeks to find better rates.

    1. I got a quot two days ago with the similar rate. Refi into 12 years. 2.75% with closing cost ( ~ $2200) or 2.99% no cost refinance.

  14. I couldn’t have answered the title q before reading this post. Your explanations make a lot of sense, thanks! I find it so annoying as a homeowner when banks sell my mortgage. Getting setup on a new system can be a real pita. But I’m glad to be able to refinance. Even though it can take forever, the savings are really worth the time and effort.

  15. I was quoted a 15yr fixed at 2.62% no points yesterday or 2.5% with .375 points. I feel like it will still go lower so im still waiting. Has anyone seen better?

    1. Wow very nice! This makes me curious,

      What percentage down? What is your credit score? What is your mortgage to take home pay ratio?

      Thank you

  16. Thanks so much for the article! When I heard that the Fed had cut the rate this week, I was really excited and started to look around at refinancing my mortgage. But I noticed that rates were not really dropping yet and they probably will not for a while.

    After reading your article, I will definitely start thinking from an investor’s perspective when rates fall fast due to some major event. An investor will be less inclined to want to pay for mortgages since they will be completely paid off when refinanced then what they could have gotten when the mortgage is at it’s original rate.

  17. Anyone thinking to go ARM refi now and then switch to Fixed loans when rates start going up ? Not sure how feasible it is ? What costs involved in switching from refi fixed to ARM and then ARM to fixed again depending on rates when and if they start coming back up consistently? Never thought of or done ARM before personally yet. Thanks for any inputs. Thanks for this great post

  18. Sam, with the sudden .5% drop by the Fed, do you think the mortgage rates will also drop by another .25 – .375% within a month or so? I know it’s never one-to-one.

    I don’t know if you remember, but I was on the sidelines waiting to refi. If it drops another .25 – .375%, I’m going to have to refinance immediately.

    Thanks for this post.

  19. Matt Christensen

    Just locked in 3.125 on 30 no points or fees. No large balance either. Drops mortgage to less than I could rent.

  20. Daniel Cohen

    Great article Sam!

    Any suggestions on how to go about finding the bank(s) offering the lowest rates around?

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