Refinancing? Don't play games
BY TERRY SAVAGE Sun-Times Columnist Feb 4, 2008
Updated: May 3, 2013 12:14PM
Don't speculate on interest rates with your mortgage. Even as the Federal Reserve Board made its latest and well anticipated cut in short-term interest rates, mortgage rates started to climb higher last week. It was the first up-tick after the sharpest four-week decline in mortgage rates in 18 years.
A clear message
The message is clear: If you plan to re-finance, do it now, and lock in the best rate you or a mortgage broker can find.
If you wait, thinking your can time your refinancing to take advantage of another dip in interest rates, you could lose -- big time.
The average 30-year fixed rate mortgage is now 5.88 percent, according to Bankrate.com -- up from 5.57 percent last week. Similarly the 15-year fixed is now averaging 5.38 percent, up from 5.11 percent the week before. And even the 5/1 Adjustable Rate Mortgage is 5.66 percent up from 5.35 percent the previous week.
There are two important reasons not to try to "game" the mortgage rate market if you know you need to refinance, or are one of the very few still buying a new home.
First: The Fed does not "control" long-term rates. The Fed can pump liquidity into the system, and target short-term rates. But it can't control the longer-term bond market, where literally trillions of dollars of debt are freely traded each day. In that bond market, the very sophisticated participants are considering the impact of all that liquidity -- and its potential to create inflation down the road.
Typically, the 30 year fixed rate mortgage tracks the yield of the 10 year Treasury note (because very few mortgages are actually held for 30 years). It is not the same rate as 10-year Treasuries, of course, because individual mortgages have a higher degree of risk.
If bond buyers are worried about inflation, they're going to demand higher rates to compensate. In reality, if they sniff inflation coming, they start to sell the bonds they own, pushing prices down, and yields up.
Here's the simple rule to keep in mind: When interest rates rise, bond prices fall. And when traders sell bonds out of fear of future inflation, yields rise!
That's something beyond the Fed's power to control over the long run. The market is bigger than the Fed when it comes to long-term interest rates.
Which brings us back to your mortgage.
Mortgage rates might fall a bit farther if there is a deep recession, lowering business' demand for money. Or there could be an economic recovery because of all this liquidity, with renewed growth causing rates to rise.
But the worst case is that the liquidity the Fed is pushing into the economy now doesn't create growth, but does create fears of inflation. That creates the possibility of stagflation -- higher rates, but still a slow economy.
And that's the first and main reason why you want to refinance as soon as possible into a fixed rate loan. Don't try to beat out the bond traders, because the upside risk on rates definitely exists, and could be devastating if you still have an adjustable rate mortgage.
The second reason to lock in rates now instead of waiting is that if the economy continues to slow, the appraised value of your home could decline. In fact, if you don't have enough equity in your home, you simply can't refinance -- as millions of homeowners have already learned. They're stuck in adjustable rate loans, worrying about the possibility of higher monthly payments.
The roof over your head
So don't play interest rate games with the roof over your head. Take advantage of this possibly temporary dip in mortgage rates to start the refi process now. And as you start the process, get a written rate guarantee from your lender.
If rates drop again, and your house retains its value, you can always refi another time. But if rates rise, you may not get this chance again. And that's The Savage Truth!
Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.