Getting ready to refinance your mortgage but waiting for rates to fall just one more time? Is that extra 1/8th percent ready to drop? Some consumers begin to follow economic news and perform no shortage of due diligence trying to pick the perfect time to lock in an interest rate. Loan officers are asked on a daily basis, “What are rates going to do?” The fact is nobody knows and for those who say they know, well, they don’t. Even the most learned of financial analysts get it wrong. There are just too many ingredients that affect mortgage rates, some expected but many unexpected, for any solid projection to come to fruition. Yes, there are certainly general trends that can be pointed to but trying to outsmart interest rate markets can go wrong rather quickly.
Conventional mortgages, both fixed and adjustable, are tied to specific indices. A traditional 30 year fixed rate might be tied to either the Fannie Mae 30yr or 3.0 mortgage bond. Freddie has its own bond as well. Adjustable rates can follow the Constant Maturity Treasury index or others. When investors, both individual and institutional decide where to allocate their funds, they do so by evaluating current economic data and try to predict the future.
Mortgage bonds, like any bond, provide the investor a fixed rate of return. Stocks on the other hand do not. Stock prices in general take a nod to recent and current economic data. When investors are bullish on the economy, more money will flow into stocks and out of bonds. Conversely, when investors think the economy is headed for a slowdown, the opposite can happen. Money leaves stocks and moves into bonds. Bonds won’t yield very much but that’s not the attraction. The attraction of a bond is safety, not hitting the jackpot on an investment bet.
So, here’s where it can get a little dicey for individuals waiting to squeeze just a little more out of rates. Your loan officer will tell you that it takes quite a bit for interest rates to move lower. After a series of extended negative economic reports, rates will drift lower. For a rate to drop 1/8 or 1/2 percent lower, that might take some time. A single economic report released that might indicate the economy is headed for a fall won’t have much of an impact. A series of such reports will.
On the other hand, after rates have drifted lower or remained stagnant, it doesn’t take much for rates to rebound. And when they do rebound, the change in available rates occurs much faster compared to falling lower. Inflation news not good? That’s bad news for bonds and many investors will see an immediate response in the prices of bonds, including mortgage bonds.
This all means that if you’re waiting on rates to fall just a little bit more, you run the risk of the opposite happening and when it does, rates could move higher and never look back. When you ask your loan officer what he or she thinks rates might do, the experienced loan officers know not to answer that question directly. They can tell you where rates have been and why, but they can’t tell the future. Can you imagine how upset you would be if your loan officer suggested you hold off another week and wait for a particular economic report only to ultimately find out the loan officer was wrong and your refinance opportunity is now firmly in your rear view mirror?
The point is this: if you’ve got an attractive rate now and it makes sense to refinance, or you’ve got an accepted offer on a home and trying to time the markets, take what you have. The chances of rates moving up is higher compared to rates moving lower in our current environment. Don’t try to outsmart the markets.