Refinance now, or wait for the perfect rate?
People ask a lot these days what the best refinance rate is they can get. And, will the rates get lower? My crystal ball is no clearer than anyone else’s. One of my mentors at Wells Fargo Bank years ago claimed, “The best predictor of where interest rates will be is where they are right now”. True as it may be, it doesn't answer our question. Financial theory also proposes that market prices reflect all currently known information. As borrowers and investors in real estate, we must then make assumptions about what the future holds.
With that in mind, what does the future hold for each of us and the collective market? What impact on mortgage rates, and should we lock today or wait? We know we are at historically low interest rates due to the economic upheaval and reduced demand for products that require financing such as mortgages, autos, credit cards, etc. This has created a great opportunity based on history to lock in these low rates. The question is - can it get better? We simply don’t know for sure. I could argue both sides of that question and come up with plausible reasons to wait for the perfect day to lock in the lowest possible rate. We recently had such a day, and a market frenzy. No sooner than we thought we were about to get the best, the market abruptly reversed itself for varied and competing reasons, rates have rapidly trended back up. So, here we sit again at about 5.0% , wondering when and if it goes back down to 4.75% or even 4.5%? Wouldn’t that be great!
As consumers we are always looking for that extra small discount or a special sale. We should be thinking and acting like investors. Investors seek out stable, predictable, low cost credit to finance real estate investments for the 10-20 year long run. Since our real estate is truly a large investment in our future in many ways, we should perhaps pay attention to those who have dedicated long careers to making smart moves and locking in sure things for the future.
This past week I had the pleasure of listening to a rare dialogue with two investment managers who some consider perhaps the best in the business of guessing the direction of interest rates for their near trillion dollar investment portfolios, Bill Gross, the CEO of Pimco bond funds, is the largest bond fund manager in the world. His life revolves around interest rates, credit, and bond instruments like treasuries and mortgages. The other is a less visible investment manager who’s name escapes me but was described as one of the most successful over the past 40 years.
Both managers are investing hundreds of millions right now, on the assumption that interest rates will rise dramatically within 3-5 years. They will likely reach the double digit level of the late 70’s and early 80’s. Largely due to the huge need of the government to finance the 2-4 trillion economic stimulus now being promoted stabilize the economy. In addition, the ever growing baby boomer retirement needs will add a financial burden to an already over taxed government budget and entitlements. Bill Gross’s position is that treasury rates, which directly impact mortgage rates, will rise again to 8% or more. That easily places mortgage rates of 9-10% or more. The other individual was even more concerned and suggests long term treasury rates could go to 17% as they have before. Ouch!
Hence the answer to the question. Think like an investor, lock in today’s rate and plan for the sure thing. The risk of waiting another 3-6 months to time the market, leaves one exposed to dramatic upward rate moves if the housing market shows even the slightest indication of a recovery and, or, the stock market and oil prices turn upwards again. To emphasizes the point, a loan amount of $300,000 saves approximately $23/mo. for every 1/8 percent rate decrease. The typical borrower now has a rate of around 6.25%. The payment savings of reducing that to 5% is about $237/mo. Or, $2,844 per year and roughly $56,880 over 20 years, etc. Waiting to save an extra 1/8 – 1/4 percent to save an additional $46/mo or $11,040 over that same 20 years could cause a missed opportunity to save $56,800, plus the additional benefit of investing that money or paying off high interest rate credit cards, etc that could double that return over 20 years.
For those with adjustable rate loans, the temptation is to keep their now low rate for a couple of years and then lock before the rates go up. Chasing upward interest rate moves is like chasing the outgoing tide. It is always just ahead of you and you are afraid to jump in until it is too late. If interest rates indeed do go up dramatically, ARM rates could go over 10%. This would be painful for those planning on retiring in their homes with low payments. Is an extra 1/8 percent or a couple hundred in costs worth the risk? Think like an investor and where you may be in 5, 10, or 20 years. Lock in a great fixed rate for long term benefits and financial security in retirement.
If someone you know needs to refinance their mortgage, I can quickly provide a detailed financial analysis showing the new loan terms, closing costs, and monthly savings and long term return on investment.
Dave Van Waldick
Principal / Broker
Western Realty Finance
888-930-4223
http://www.wrfco.com/ – We make home loans easy!
http://www.eprequal.com/ Get prequalified in 5 Minutes online.
Twitter: http://twitter.com/MortgageDave - You have questions. I have answers.
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