May Newsletter: Interest Rates and Temporary Buydowns

Interest Rates

We finally caught a break from the persistently strong jobs data when the Bureau of Labor Statistics’ (BLS) April Jobs Report (released the first Friday in May) significantly underperformed market expectations coming in at 175,000 vs 243,000.

This bolstered the positive bond market mood since the Fed’s recent announcement that it would be a bigger player in the mortgage-backed security (MBS) market. The price of MBS varies inversely with (and is the biggest driver of) mortgage interest rates. When MBS prices are high (e.g, when there are more buyers competing for them), mortgage rates come down.

This positive direction will be strenuously tested this week as both Producer Price Index (PPI) and the Consumer Price Index (CPI) come out on Tuesday and Wednesday, both of which are closely watched by the Fed as important barometers of inflation.

Current direction notwithstanding, we are reporting an increase month over month since our last report from 7.2% to 7.45% but we are down from a peak of 7.58% since our last letter.

Temporary Rate Buydowns: A Word of Warning

If you expect to be entering the housing market (either buying or selling) over the coming months, you are almost guaranteed to come across the hot topic of Temporary Rate Buydowns. And there is a good chance you will be faced with the question of applying thousands towards a temporary buydown on your mortgage.

If the circumstances are right, it is possible to receive real benefit from this product, but I’d like to offer a word of warning: they are not always what they are made out to be, and it’s important to understand what they are and how they work as you will likely encounter them whether you are buying or selling.

In this fairly comprehensive video, I answer the question of whether they are a scam, explain how they work, evaluate alternative uses of your money, offer strategies on how to best leverage them, and more. This should be pretty close to everything you need to know about Temporary Rate Buydowns.