Any downtrend in rates brings temptations and pressures to both professionals and civilians. Hence, a number of rules cribbed from prior declines and adjusted to this one.
7 rules of falling mortgage rates
1. The most powerful is the most obvious, and hence quite possibly the most overlooked: The downtrend is in the past, plus the stronger and deeper it’s been, the less likely to continue. Rates have fallen from 4.25 percent to almost 3.50 % in 6 months, when at the start all thought they would rise, and during a shift from Fed easing super-cycle to tightening.
2. Heard at trading desks everywhere, and usually with exasperated impatience: “Oh yeah? Exactly what are you going to do if you’re wrong?” Beware expecting or even hoping that any rate decline will continue. Most vulnerable: marginal qualifiers and refinances. Take any deal that actually works, lock it, and get it done in time.
3. Never trust to faith that in case rates rise, a compliant lender will extend your deal. Believe that in virtually any rate decline, lenders may become too busy, their process congesting into gridlock. At the outset of locking, extract not just a promise to complete within the lock, but also a list of things you can do to speed it.
4. Never expect a lender to renegotiate to the downside if rates fall after you’ve locked. No expectations create more ill-will, especially if the lender has failed to be clear – painfully so – about what can and cannot be done. Civilians often assume that a lender unwilling to reset a lock lower intends to maintain the difference, but not so: every rate lock triggers a series of rigid hedging up to Wall Street and beyond, in which every player needs and wants nothing but the initial lock to close, no extra money made.
5. The best time to take advantage of a super-low adjustable-rate loan? When the spread between fixed and adjustable is wide. Not now. ARMs are predicated on indices all tied to the Fed. Its overnight expense of money is still, after one hike, only 0.25 % to 0.50 percent, but long-term rates around the world have collapsed upon short-term ones. Short-term ones can’t go any lower (the overseas ones below zero will find it difficult to go any farther so). Even the classic 5-year ARM is holding about 3.00 percent, and it does not make common sense to take rate risk to get today’s little more than half-percent below long-term fixed.
6. A financial-planning decision with different aspects in each and every family: whether to make the most of super-low rates to refinance or buy using a 15-year loan? We are opposed, except in two cases: those too frightened to invest, and those who experience difficulty saving. All others…begin using this question: If rates are one inch from an all-time low, why be in a lather to pay back the money? On 10-year horizons, you can’t discover a time when a diversified number of mutual funds have failed to earn 3.5 percent per year. Let home price appreciation take care of “building equity” and invest all free cash flow – first within the retirement account free lunches, then hello, mutual funds.
7. This time it’s different. In financial circles, anyone asserting “this time is different” gets laughed outside the room. Except when it is different. Now. Right this moment. The main reason for this year’s decline in rates – and the long wave pushing down for decades – is the mix of a rapidly aging world and an excessive amount of debt, never seen before. If your population and economy are increasing quicker than borrowing, okay. If not – despite widespread forecasts for inflation – the result has been profound economic slowing and the fact or proximity of deflation.
Be cautious out there, but odds favor lower rates to come. Slowly along with volatility, but those are the odds. Follow the rules. Nick & Cindy Davis work with several lenders here in the Tampa Bay area that can assist you in purchasing your new home. If you are ready to get started, contact us at 813-300-7116 or simply click here and we will be in touch.