Mortgage rates. One month they are up, the next, down. Who can tell when the best time is to buy a house? Why lock in now, only to have the rates drop?
These are some of the many tough questions for which consumers want answers before they sign a mortgage agreement. For many, the interest rate is just as important as the selling price of the house itself.
Mortgage rates fluctuate frequently. It is very rare that they remain constant for any lengthy period of time. This year has shown the general public just how tricky following rates can be.
There are valid opinions on both sides as to whether rates will rise or fall during the remainder of 1997. Most opinions, however, seem to lean towards an upward trend. Forecasters can only be as definite as the national economy itself, which is not always constant.
Mortgage rates took a turn downward through the first half of this year. Looking back to more than a year ago, rates were at a high point of around 8.5 percent in June 1996. Mortgage rates began steadily falling from June through December of 1996.
Starting around the end of December they began climbing back up, reaching close to 8.45 percent in March. Mortgage rates have been falling ever since.
The average rate on a 30-year, fixed-rate mortgage fell to 7.43 percent in the week ended July 24 from 7.47 percent the week before, according to the Federal Home Loan Mortgage Corp.
According to Ron Talley of Wharton Econometrics Forecasting Associates (WEFA), “Long-term fixed mortgage rates were around 7.95 percent in May 1997. Our forecast is that they will edge up to 8.25 percent by year-end.”
WEFA also predicts that adjustable rate mortgages should rise to around 6.11 percent, or about 0.3 percentage point, over the next six months.
The consulting organization says its forecast is based on the belief that the economy is to remain strong throughout the year, as the labor market continues to create jobs.
With more people working, consumer spending is likely to rise and put upward pressure on the prices of goods and services (a.k.a. inflation).
One of the most compelling facts about mortgage interest rates is that they are positively affected (move lower) by news of a poor economy. The reasoning behind this is that when the economy is doing relatively well, inflation is more apt to occur.
Inflation is a driving factor behind most investments, especially long-term holdings such as Treasury bonds.
When inflation is perceived to be a threat to the standard of living, the Federal Reserve will raise short-term interest rates in order to slow down borrowing activity (and curb economic growth). Bond investors will usually require a greater return on their investment, which often results in higher yields on Treasury notes and bonds.
When the rates on Treasury securities rise, generally mortgage interest rates follow. Why? If a lender chooses to sell your mortgage loan to an investor, the lender (and the investor) will likely use Treasury note/bond yields as a benchmark for value.
A good rule of thumb is that the interest rate for a fixed-rate mortgage mirrors the movement of yields on the 10-year Treasury note and 30-year Treasury bond.
Introductory interest rates on one-, three- and five-year adjustable rate mortgage loans are typically affected by the yields on one-, two- and five-year Treasury securities.
So how do you follow trends in Treasury yield rates? The business section of your local newspaper will usually publish these numbers. Other sources are business newspapers and some financial news channels on cable television.
Because there are many factors affecting rates it is often difficult to pinpoint the perfect time to lock into a mortgage. Often, would-be borrowers wait out a downward trend, hoping for an even lower rate, only to find that the rates have begun to climb again.
Keeping track of the interest cycle can provide clues as to the overall trend; however, waiting too long could cost you more money in the long run.
Mortgage rates directly affect the amount of monthly out-of-pocket expenses one must pay for his/her mortgage. However, slight changes in interest rates don’t affect mortgage payments all that much.
A rate difference of 0.25 percent has only a slight overall effect. For instance, a $100,000 mortgage loan at a fixed 30-year rate of 7.5 percent would result in monthly principal and interest payments of $699.21.
Dropping that rate to 7.25 percent would create a payment of $682.18. The difference equals a monthly savings of $17.03.
Perhaps if one waited too long the rate would have climbed back up to 8 percent, which would boost the monthly payment to $733.76.
If you don’t plan to follow these movements on your own, you can establish a relationship with a trusted lender and maintain regular contact. A lender who wants your business will be glad to keep you informed of changes in mortgage rates. Your local newspaper likely also will have listings of area mortgage rates that are updated on a regular basis. The Tribune runs such listings on Friday, Saturday and Sunday.
The best option is to closely follow mortgage rates if shopping around for a house. By tracking current trends, a borrower has a better chance of obtaining interest rate savings. But remember that there is no guaranteed method for predicting where mortgage rates will end up by the time you make your purchase decision or close the transaction.
Getting the lowest rate possible is important, but don’t let it dictate your entire financing decision.
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Jim DeBoth is president of Mortgage Market Information Services. Address your questions to Mortgages, c/o the Chicago Tribune, Real Estate Section, 435 N. Michigan Ave., Chicago, Ill. 60611. Sorry, we cannot accept questions over the phone and will not give personal replies.
