Flatting Yield Curves, Mortgage Rates and Choice of Mortgage
Question: Short and intermediate term government bond rates have risen substantially more than long-term bond rates in recent months. This pattern of rates is called a flattening yield curve.
To what extent has the government bond yield curve flattened between January 4, 2018 and July 26, 2018?
Has the yield curve for the mortgage market also flattened between January 4, 2018 and July 26, 2018?
Calculate mortgage payments for a 15-year and 30-year Fixed Rate mortgages on these two dates. Calculate equity after five years for the 15-year and 30-year mortgage rates on the two dates.
Most market analysts at the beginning of the year were advising clients to take out a 15-year mortgage rather than a 30-year mortgage if the client could obtain the necessary down payment.
Have changes in market conditions warranted a change in this advice?
Descriptive Statistics on Government Bondn and Mortgage Market Interest Rates
Below are calculations on government bond yields and mortgage market rates for the two dates.
| Government Bond Yields | ||
| 4-Jan-18 | 26-Jul-18 | |
| 2-year U.S. Bond Rate | 1.931 | 2.686 |
| 10-year U.S. Bond | 2.463 | 2.975 |
| 30-year U.S. Bond | 2.786 | 3.101 |
| 10-year minus 2-year | 0.532 | 0.289 |
| 30-year minus 10-year | 0.323 | 0.126 |
| Mortgage Market Yields | ||
| 4-Jan-18 | 26-Jul-18 | |
| 5/1 Year ARM | 3.45 | 3.87 |
| 15-year FRM | 3.38 | 4.02 |
| 30-year FRM | 3.95 | 4.54 |
| 15-Year mins 5/1 ARM | -0.07 | 0.15 |
| 30-year minus 15-year | 0.57 | 0.52 |
Observations:
The gap between 10-year and 2-year bond rates and the gap between 30-year and 10-year bond rate narrowed considerably between 1/4/2018 and 7/26/2018.
The spread between the 15-year FRM and the 5/! ARM went for negative to positive from January to the end of July. This spread remained low.
The spread between the 30-year FRM and the 15-year FRM barely changed.
Below are calculations on mortgage payments and mortgage balance reduction after 5 years for the two mortgages on the two origination dates.
Mortgage Payments:
| Mortgage | 4-Jan-18 | 26-Jul-18 |
| pmt 15-year loan | $2,127.01 | $2,222.07 |
| pmt 30-year loan | $1,423.61 | $1,527.19 |
| 15-year pmt minus 30-year pmt | $703.40 | $694.88 |
Below are calculations on mortgage balance after 5 years of payments for the 145-year and 30-year FRM on the two origination dates.
Mortgage balance after 5 years of payments
| Mortgage | 4-Jan-18 | 26-Jul-18 |
| 15-year FRM | $216,325.31 | $219,268.50 |
| 30-year FRM | $271,122.83 | $273,639.10 |
| Diff. | ($54,797.52) | ($54,370.60) |
Observations:
The gap between monthly payments on 15-year versus 30-year FRM went down between January and late July 2018 despite the slight flattening in mortgage rate yields. (This occurred because the higher rates had a larger impact on 30-year payments than 15-year payments.)
The mortgage balance reduction obtained by taking the 15-year FRM over the 30-year FRM remains around $53 k.
Conclusion. The government bond yield curve has flattened quite a bit. The mortgage market yield curve has not changed much. The 15-year FRM remains the preferred mortgage option for those who can afford higher payments.
Interested Readers can go here for some articles on mortgage math and choice.
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