Where are mortgage rates headed?
We recently decided to refinance our mortgage from a 15-year, higher interest rate to a 30-year with a lower interest rate. Our friendly local bank sold our loan to Freddie Mac a few years ago, which irked me tremendously at the time, but which is convenient now, as it qualifies us for the Making Home Affordable refinancing program. We’ll get a much better interest rate and a significantly lower monthly payment, which will help, as our income has dropped significantly (my spouse was laid off in December), and it could also help us benefit from the inflation that is undoubtedly in our collective future. We are not planning to live in this house forever, but this will keep it more affordable until we have the opportunity to sell and move (not this year, not next, but…you know.)
Anyway, when I submitted the refinance application about two weeks ago, I was told that interest rates had remained steadily low for months and there was no reason to think they would change. (See me rolling my eyes?) Interest rates have now gone up a bit, and I’m trying to decide whether to be a super-squeaky wheel and do whatever I can to get this refinance pushed through as quickly as possible before rates rise even more…or sit back and bide my time, assuming rates will go down again, at least temporarily, and hoping our process will fall neatly into that anticipated "low rate" window.
What do you think? Will mortgage rates drop again, or are they now on an irreversible rise – and why?
Personally, I think the slight rise in interest rates we’re seeing is because it’s house-hunting season. I would expect them to drop again, maybe even lower than before, in the late fall… especially since we’re having record numbers of foreclosures with more expected. The banks will be hurting for cash and home buyers so badly that they’ll have to lower the rates again (at least for people with decent credit – people with bad credit can expect sky-rocketing rates). Of course, the confluence may cause the rates to go up as banks desperately try to make more money from fewer people and to see everyone as a credit risk… but I think that will be on an individual lender basis, not necessarily prime.
I’d be a squeaky wheel either way. Banks don’t have any problem calling you every hour on the hour every day when you’re slow… give them a taste of their own medicine. Given your circumstances, their delay could put you at risk of default on your current loan… which, if I were really paranoid, might be exactly what they’re trying to do so they can foreclose and mitigate their risks.
Mortgage rates are based on the 30-year Treasury bond. Think of it this way: the government is offering X-rate for their 30-year bonds. The government is the safest bet there is (even these days), so mortgage rates available to us slackers will always be above whatever the 30-yr rate is (>X), by an amount that satisfies the additional risk the bank is taking by lending to us instead of Uncle Sam.
The 30-year rate has indeed gone up dramatically in the last two weeks. There was recently a link to two very good articles in Seeking Alpha about this, written by people much smarter than me, which explained why they are expected to continue to go up, but I cannot find the thread where those were posted at the moment.
In summary, bond investors the world over are preferring to buy short-term US bonds rather than long term bonds, because most people do not want to be locked into a long-term bond with the government given their willingness to print money out of thin air and drive up inflation. When fewer people are willing to lend the government money long term, the government has no choice but to offer higher-return bonds, which in turn means your bank raises rates on you.
I would lock into a long-term fixed rate now if I could. I currently rent and intend to keep it that way, but if I was in your shoes, that is what I would be considering. I would not expect rates to come down – they’re already down to historic lows and all the macro-pressures indicate higher – even much higher – rates in the near future.
I finally found the link to one of the articles. You basically have a self-made billionaire "betting the farm" on rising interest rates/inflation. I wouldn’t bet against him:
Thanks so much, Patrick and Plickety. I’m not willing to wait until Fall on the chance that rates might drop a little. Even if they go up significantly right now, I think we’ll still get a rate (on a 30-year) that is lower than our current rate (on a 15-year).
I feel safer assuming that rates will keep going up.
I nudged the bank rep via e-mail and got an immediate response (love my local bank) – they decided they didn’t need a new appraisal for our house, so we’ll save some $$ there, and a commitment letter will be on its way shortly.
Thanks! I will be so glad to have this DONE. Wish we had thought of it a few months ago, but it’s a process…
Patrick’s response is spot-on. Fear of inflation seems to be driving Treasury yields higher, which in turn drives long-term mortgage rates higher. China, a big buyer of Treasuries seems to be cutting back on their purchases of longer-dated debt in favor of short-term bonds. Normally, investors prefer short-term bonds when there is more of a concern of inflation since they don’t want to get stuck with a long-term bond with a lower relative yield. Rates are not based on seasonal trends whatsoever. One additional thing to keep in mind is that the spread between the 10-yr yield and the 30-yr mortgage rate is not static. When the housing market started going south, the spread got wider. In other words, mortgages became riskier. However, now that the Fed is buying Fannie and Freddie mortgages, they might decide to shorten the spread and take on more risk. I’ve read that the spread is quite a bit smaller now than it was a couple months ago.
Just a little update.
I squeaked and squeaked, but apparently not soon enough or often enough. We learned only yesterday that the commitment letter was mailed 3 weeks ago and apparently got lost in the mail. When we figured it out, it took only a day to receive a replacement. In the meantime we lost the low interest rate we were expecting. This will translate into a $100 higher payment/month than what we were originally anticipating. No small sum for a struggling family.
Never, ever believe a bank person who tells you there is no need to lock in an interest rate. If we had done so at the start, we would have saved 0.5% on our rate. I am trying very, very hard not to seethe about that. (Water under the bridge. Water under the bridge. Water under the bridge.)
We’re locking in the current rate first thing Monday morning and closing as soon as we possibly can. I’m not waiting to see if rates will drop – I doubt they will, and I’m nervous that this refinancing program that we qualify for will go "poof!" or the rules will get tighter and we’ll be disqualified for some reason. I don’t trust the government to do what’s in my best interest (no surprise there).
One point I should make is that the bank people handling these special government-sponsored refinances are NOT the usual folks who do them, which is one reason I think we ran into snags. It’s the collections office, not the loan office, that is handling the refinances that are through programs intended to reduce the number of future foreclosures. Logical, perhaps, but not efficient.
Our real estate lawyer was very surprised that we were even getting a refinance, especially with a major drop in income and no appraisal, because apparently it’s become significantly more difficult to qualify for a mortgage now. I am soooooooo glad we moved our variable-rate debt to a fixed-rate loan back when we qualified to do so. If anyone reading this is considering doing either of those things, I think it would be folly to delay.
Live and learn. I’m posting this so that others might avoid my mistakes.
Oddly enough, we just learned that our mortgage rate has been lowered, substantially. We purchased our current home 5 years ago with an ARM, which started at 4.25%. A couple of years later, it crept up to 4.5%, where it has been stable since. Today, we received notice that the rate has decreased to 3.0%! We’re happy to have the rate reduction, as it saves us around $200 per month, but does anyone have any thoughts as to what gives?
It must be part of the stimulus program. Now you have an additional 200 bucks to consume with! Time to head to the mall.
Seriously, our bank offered to lower our interest rate a couple of months ago as well. I don’t know what is up with that!
I think this might be in response to the massive amount of foreclosures that have started… banks are more willing to lower their rates for good-paying current customers than to risk losing it all with another foreclosure. The banks know the market is crap and soon almost everyone without substantial equity is going to be upside down. They’re hoping to retain the customers they do have as long as they can.