Mortgage Rates, Opportunity "Locks"

Ads about Mortgage Rates are everywhere. You cannot go onto your computer without seeing ads from several different lenders and the television is full of ads touting their mortgage rates or the fact that rates are way down.

Yet, there are still borrowers who are sitting on the fence, hoping that they will come down just that last little bit so that they can time the market just right. Whether it is for bragging rights or for the lowest of all possible payments, people sometimes seem to think that there is always a better rate coming.

Mortgage rates are a bit different than some of the other interest rates about which consumers see news articles. Just yesterday, there were articles all over the news about the possibility of “negative rates”. The rate they were discussing was for the Federal Funds Rate, commonly referred to as the Fed Funds Rate.

The Fed Funds Rate (that is the short term rate charged to member banks and depository institutions for overnight borrowing) is not the rate that individual borrowers get for their mortgage loans, cars, etc. The idea of lowering the Fed Funds Rate is that if the cost of borrowing goes down then the cost of credit from the banks to the consumers will also decrease.

The United States Central Bank has hinted that they may buy as much as another $100 Billion in Treasuries. The Fed already has the go ahead to purchase $1 Trillion worth of mortgage-backed securities and $200 Billion of the debt secured by Fannie Mae and Freddie Mac.

What does all this mean for the mortgage rates that homeowners have to pay? It really depends on the economists you listen to! The Taylor rule (named after the economist who devised the formula) states that the key interest rate to revive and stimulate the economy should go down to negative ½%. Travel around the net a while though and you’ll find several economists who say that this is a recipe for disaster, just inviting inflation which will certainly drive borrower’s rates up.

No one can ever time the mortgage rates perfectly all the time. Even the long time pros who have been in the industry for decades have been caught when a massive market move came, sometimes to such a great detriment that it wiped companies out. Mortgage rates are driven more by the sales of the bonds in the secondary market than by what the Fed Funds Rate does on any given day.

Those bonds can become extremely attractive during times when the stock market is suffering and people look for a safe haven, or they can become extremely unattractive if there is a large offering of bonds in the marketplace, there are no buyers, and rates must rise quickly to make the bonds more palatable to potential buyers. In other words, mortgage rates can move quickly, up or down, and often for reasons for which no one was prepared.

Everyone knows to watch for when jobless claims come out, GDP numbers, Housing Starts, Retail Sales and other tell tale signs of a growing or contracting economy. However, in today’s environment, a terrorist attack around the world, the White House announcing a new program which is either widely accepted as good or bad, or any number of other unexpected items can cause a shock wave to the entire system, sending rates shooting up or down. Sometimes the move is very temporary and sometimes it can take a while to reverse these sudden changes.

If you are one of the many watching the mortgage rates and trying to time it just right to either buy or refinance your home, then you may want to consider this: rates are extremely low. Whenever I get the question of what will rates do in the future, I always answer the same way,

“There is only one sure answer for that question, it is certain that they will do one of three things – they will go up, go down or stay the same”. No one is ever right all the time on rates and I have seen all too many people who were trying to time it just right watch as the rates took off and suddenly they were too high for them to benefit any more or they missed their opportunity to buy.

My advice is to decide where it makes sense to you to do a loan and then when it meets your needs, lock and close it – then never look back. That way you won’t be one of the ones who “had a chance to buy or lower your payment, but got caught sitting on the fence and missed your chance when the rates shot up”.

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