Author Topic: Do mortgage interest rates drop when the market drops?  (Read 1607 times)

RedmondStash

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Do mortgage interest rates drop when the market drops?
« on: December 09, 2017, 11:03:42 AM »
Does anyone know if mortgage interest rates tend to drop when the stock market drops? I mean long-term, like a recession or period of stagnation that lasts at least a few years.

I realize the pay-off-the-mortgage question has been debated to death, but I've got a HELOC with a variable rate that's currently under 4%. (Not switching to fixed-rate for various reasons, in part because I unexpectedly FIREd recently.) My main concern is that the market may tank while at the same time the HELOC's interest rate rises, putting me in a position where I have to sell investments "low" to service the debt. I'd sleep easier if I knew that typically, generally, as a rule, no guarantees, drops in the market are accompanied by drops in interest rates too. So proportionally, mortgage payments relative to value of investments wouldn't change a lot.

Otherwise I'll keep itching to "sell high" and pull money out of this great bull market to pay down the HELOC, even though its rate is currently favorable.

(Yeah, I know, pick an AA and stick with it. But part of assessing my risk tolerance is understanding the factors contributing to that risk.)

Thanks.

Another Reader

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Re: Do mortgage interest rates drop when the market drops?
« Reply #1 on: December 09, 2017, 11:37:38 AM »
What index is tied to the HELOC rate?  It's that specific rate that it is tied to that should concern you.  For example, if the rate is tied to the prime rate, it will likely go up, at least while the Fed raises rates.  That's because the prime rate usually moves with the Fed funds rate.

There is often an inverse relationship between interest rates and stock prices.  As interest rates go up, new issue bonds become more attractive, and investors push more money in that direction and there is less demand for stocks.

If a modest rise in interest rates will force you to sell to service the HELOC, in your shoes I would pay that loan down to a more comfortable level.

RedmondStash

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Re: Do mortgage interest rates drop when the market drops?
« Reply #2 on: December 09, 2017, 12:37:51 PM »
What index is tied to the HELOC rate?  It's that specific rate that it is tied to that should concern you.  For example, if the rate is tied to the prime rate, it will likely go up, at least while the Fed raises rates.  That's because the prime rate usually moves with the Fed funds rate.

There is often an inverse relationship between interest rates and stock prices.  As interest rates go up, new issue bonds become more attractive, and investors push more money in that direction and there is less demand for stocks.

If a modest rise in interest rates will force you to sell to service the HELOC, in your shoes I would pay that loan down to a more comfortable level.

Thanks; good to know. I believe it is the prime rate. And yeah, I expect it to go up over the next few years. It's already risen by .75% since we took the loan out a couple of years ago. I figure if/when it approaches 5%, it may be time to get serious about paying that thing down.

talltexan

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Re: Do mortgage interest rates drop when the market drops?
« Reply #3 on: December 11, 2017, 09:57:38 AM »
Many adjustable rate mortgages--such as mine--are indeed indexed to LIBOR.

If you want to get a general sense of what the mortgage market will look like, watch the 10-year treasury yield. Most banks sell these bonds in order to put together the cash that buys your house. I always check it first thing in the morning. 

boarder42

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Re: Do mortgage interest rates drop when the market drops?
« Reply #4 on: December 12, 2017, 01:54:32 AM »
Typically bond yields fall when the market starts to fall as money flows from the market into the "safe haven" of bonds. And when money flows to bonds the price goes up and the yield falls and the 10 year yield is what most mortgage rates are based on.  We're at a weird time though bc typically when the market is at all time high bonds are at all time lows or close to it right now we have both sitting at near all time high in price due to what the central banks did to stimulate the recovery from 08.

Remember high price for bonds = low yield = lower mortgage rates.

So it will be interesting to see what happens if the fed continues to raise the cost of borrowing and the market crashes. Yields would have to fall back into the toilet you would think.

talltexan

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Re: Do mortgage interest rates drop when the market drops?
« Reply #5 on: December 12, 2017, 02:30:07 PM »
Sounds like a great description of the inverted yield curve!