“Lock your mortgage rate on a Monday! You'll get a lower interest rate!”
You may have heard this suspect advice at an office party or family gathering, possibly uttered by a sketchy uncle or co-worker who has had one too many. Could your sketchy uncle be right? It seems far-fetched … but unless you are one of the wizards who hold the keys to the financial system, everything about interest rates and financial markets may seem like sorcery.
Is it really smart to get your loan on a Monday? Will your interest rate really be lower? The answer is that Monday doesn't necessarily offer a better interest rate - but it does offer more stability throughout the day. Which means you may want to lock your interest rate on a Monday. Read on as we explain how mortgage rates are calculated throughout the week, to see if Monday is indeed the right day for you to close that deal.
The Importance of “Rate Lock”
If you really want to strategize your mortgage down to the day, you need to understand "rate lock." Locking your rate is an important milestone in the process of applying for a loan. A loan officer may quote you a preliminary interest rate on your first sit-down. Don’t bet your life on that quote. By the time your loan closes, that quoted rate could be a distant memory.
Your interest rate is only set when you either 1) close the loan, or 2) “lock your rate” prior to loan closing. However long it takes the loan to actually close and fund, if it closes within your “rate lock” period, you are guaranteed by the bank an interest rate no higher than the one set at the time of rate lock.
Rate lock periods range from 30 days to 360 days. You pay the lender for this privilege in the form of an incrementally higher interest rate. The longer the rate lock period, the higher the interest rate ticks up. Rate locks longer than 90 days may incur non-refundable fees as well. Basically, you pay more for longer periods of certainty.
The rate you get will usually depend on the date — and even the hour — of rate lock.
Who Decides What the Day’s Mortgage Rates Will Be, and How?
The interest rate you pay for a mortgage is determined by the prevailing price of “mortgage-backed securities” (MBS).
An MBS is a type of bond, sold to investors by the government-chartered mortgage banks Fannie Mae and Freddie Mac.
In some ways, MBS are just like stocks, bonds, and commodities. They are traded on a public market. The price is dictated by supply and demand. Fannie and Freddie set the supply. The demand is driven by market factors — tariff announcements, wars, changes in the price of oil. These big market events that can be hard to predict. The prices of MBS can change daily or even hourly.
Mortgage interest rates are inversely related to MBS prices.
- When the price of MBS increases, mortgage interest rates decrease
- When the price of MBS decreases, mortgage interest rates increase.
What About the Fed?
When the Federal Reserve announces that they plan to “increase interest rates,” home shoppers go crazy, afraid they will take a bath on mortgage interest.
Fed interest moves actually affect the mortgage market less than people think. The Fed isn’t telling Wells Fargo how much to charge for a mortgage. It is setting the rate at which Wells Fargo and every other bank can lend or borrow money to and from other banks.
Banks must start each day with enough cash on hand to meet statutory reserve levels. In practice, banks lend money to each other overnight to achieve these reserves. The interest rate at which they are allowed to do this is called the Federal Funds Rate. This is what the Fed has control over.
If the Fed increases the Federal Funds Rate, it becomes more expensive for banks to lend to each other. They might pass on some of this extra expense to consumers in the form of higher mortgage rates, but short-term loans and adjustable-rate loans feel the pain much more than fixed-rate mortgage loans.
So What Time do Mortgage Rates Come Out Daily?
It depends on what you mean by “come out.” Every bank produces a “rate sheet” daily. Bank employees should have access to this rate sheet first thing in the morning. If you sit down with a loan officer, the preliminary rate quote he or she gives you will be based on that day’s rate sheet.
That rate sheet, however, is specific to the bank. It isn’t promulgated by Fannie Mae or the MBS market. Moreover, it is a snapshot of where MBS prices sit as of that morning. The rate you get at closing or rate lock could be very different, even if somehow you were able to close later that same day.
Do Mortgage Rates Change Throughout the Day?
Yes. The bank’s internally-generated rate sheet may not change throughout the day, but that sheet is only a soft quote. When it comes time to lock a rate, banks ditch the rate sheet and look at the up-to-the-minute MBS market.
Just like stocks and bonds, the price of mortgage-backed securities change throughout the day, and mortgage interest rates adjust accordingly. The hour at which you lock your rate or close your loan makes a difference.
Do Mortgage Rates Change Over the Weekend?
No. The MBS market closes over the weekend. It may not matter, though, because loan closing probably will not be available over the weekend. However, market events that break in the news over the weekend can definitely affect the rates available first thing Monday morning, compared to where they sat at the close of business on Friday.
The “Monday Effect”
Now that you understand how mortgage rates are set, it may seem like your sketchy uncle was wrong. There’s nothing special about Monday. Major market news can break any day of the week. Rates are not predictably lower on Monday.
Hold your horses, though. There is a decent reason to schedule your rate lock for Monday. Rates may not be lower, but they tend to be more stable throughout the day on Monday.
If you plan to lock your rate on a Monday afternoon, the rate is less likely to change dramatically from where it stood first thing Monday morning.
Conversely, if you schedule your rate lock for a Wednesday or Friday afternoon, the rate could swing wildly compared to where it started in the morning. It could crater down (good news!) or spike up (bad news!) by the minute of the fateful decision.
Observe the average change, measured in “basis points” (0.001%), of mortgage rates throughout the day on specific days of the week throughout the history of the market:
- Monday: 17.3 (±8.65)
- Tuesday: 20.3 (±10.15)
- Wednesday: 23.8 (±11.9)
- Thursday: 20.1 (±10.05)
- Friday: 23.6 (±11.8)
As you can see, picking Wednesday or Friday to lock your rate could result in a roller coaster ride. If history is a guide, your rate could swing 0.12% or even higher, in either direction, compared to a more sedate 0.0865% on a Monday.
If you love to gamble, maybe a Wednesday rate lock is a perfect choice! For most people, the home buying process has more than enough roller coasters already built-in. Why choose a historically volatile day of the week to make a decision that will impact your pocketbook for up to thirty years?