Are mortgage rates going down? Or up?

The Fed cut rates by ½% today, and ¾% last week. So, why are mortgage rates going up?

As I have said in numerous post before, the rates that the Fed controls directly (the Federal Funds Rate and the Discount Rate) have very little to do with the mortgage rates. One is a long-term rate (mortgages) and the others are short-term rates (Fed Funds and Discount).

Last week I could get 5.375% and now it is almost 6 %. That doesn’t seem logical.

Here is what happened. A week ago Monday was Martin Luther King, Jr. Day and the markets in the United States were closed, while the other markets of the world were open and trading. While we were closed and could not make any trades, the other major stock indices across Europe and Asia were taking a bath. All we could do in the US was watch and wait until we could dump our positions on Tuesday.

Then, before the opening bell on Tuesday, the Dow Futures were down almost 500 points and the Fed stepped in and made a surprise cut to the Fed Funds and Discount Rate by an unprecedented ¾%. When the market opened, the Dow was down over 400 points and the yield on the 10 year bond was down to about 3.3% (The mortgage rates are not tied to the 10 year bond but they tend to trend in the same direction).

So, mortgage rates tumbled to 5.375% for a conventional borrower with credit scores above 680 and/or LTV less than 70% (See my post "How much will my credit score cost me on my next mortgage?" for more information on this).

I called everyone I could about the rates, and many people happily locked in the lowest rate they could have gotten in about 3 - 4 years. Some people, however, already knew the Fed was going to meet this week and most likely lower rates again. They were going to hold out for even lower rates. Then, as often happens when the Fed cuts rates, investors got a good feeling about the future of the economy and, therefore, got a good feeling about the future of the stock market and began to purchase stocks. When this happens, money goes out of bonds lowering the cost of bonds and increasing the yield (rate) on bonds. By the end of the day, the 5.375% was but a distant memory.

The stock market continued to add points over the next week and the yield on the 10 year bond continued to rise as well as - you guessed it - mortgage rates.

But, with the fed lowering rates another ½% today, surely rates had to come down.

This week, in addition to the Fed meetings, there was a slew of economic data for the markets to consume. All of it pointed to the fact that maybe the economy isn’t as bad off as previously suspected. Durable goods orders are better than expected. ADP payroll figures are better than expected. GDP was horrible, but this is from December 2007, and the markets like to look to the future.

When the Fed cut rates again today, the stock market went up, as did bond yields and mortgage rates. The best thing that could have happened for mortgage rates would have been if the Fed didn’t cut rates at all, or if they had only cut by ¼ % (as some had suspected after the economic news from the week). The stock market would have sold off and money would have flowed back into bonds, increasing the price of the bonds and, thus, lowering the rates.

The bright spot for rates as I am writing this article is that the major stock indices all ended lower today, and that selling has continued into the Asia markets. If the selling continues back to the US, we may see rates ease with the falling stock market.

So, how can we ever know when to lock at the lowest possible rates?

If I had the answer to that question I would be retired on a South Pacific island, wearing a funny shirt, and listening to ukulele music instead of writing this blog article at 11:30 PM on a Wednesday night. :)

The answer I give to everyone is to make the decision when it is right for you. If 5.375% was good enough to refinance, take it and refinance. If rates continue to fall, you can refinance again, usually at reduced costs, and take advantage of the lower rates. That is what several of my customers did during the past refinance boom. Some of my customers actually refinanced 3 and 4 times in a year and saved money every time.

Unfortunately, the last refinance boom trained people to be greedy.

We have all read the articles about the greedy mortgage industry, greedy Wall Street banks, greedy investors, etc. but we don’t read about the greedy consumer. Before the past refinance boom, a customer would call and ask for the current rates. We would discuss the costs of the refinance and the new payment, and see if it was worthwhile to refinance. Then, we would lock the rate and close the loan. Now, everyone is looking to get the best possible rate and waiting themselves OUT of an opportunity to refinance.

There is one last thing I need to share with you, much to the chagrin of one of my best and oldest friends. At the end of the refinance boom he was finally ready to refinance. (Never mind that his rate was over 6% and he could have refinanced as low as about 5.0% during the refinance boom!) As rates began to rise, he was sure they would go back down. Even as the Fed began tightening (raising rates) he thought he would still have a chance to refinance. Well, he never got that chance. So, last week when the rates were at 5.375% do you think he locked his rate? You guessed it, he did not.

The moral of the story?
Next time you have the opportunity to refinance and save money, take it.

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