Yes, all the news headlines are screaming, “Refinance NOW!” The term “mortgage rates” is trending hard. And all my friends are texting me asking if they should refinance their mortgages.
Ugh. This is getting silly. Sure, mortgage rates are now at new all-time highs, but hang on a second. Let’s catch our collective breath and keep our cool.
What’s Going on With Mortgage Rates?
- Mortgage rates are in a long-term downward cycle
- Helped on by things like the coronavirus, U.S. presidential election, and global economic uncertainty
- They just hit new all-time lows last seen in late 2012
- But could move even lower from here
First, let’s assess the situation. You’ve probably already heard that mortgage rates hit new record lows.
While technically true, remember that interest rates are a moving target, and subject to market fluctuations, just like stocks and other financial instruments.
That means they could rise or fall tomorrow, or even today, mid-day if anything material takes place.
In case you hadn’t noticed, there’s a lot of uncertainty in the world right now. Between the confusing and scary coronavirus, the impending U.S. presidential election, and the emergency Fed rate cut, panic is very real.
The stock market has seen some of its biggest swings on record in recent trading days, with the Dow falling 1,191 points one day and rising 1,294 another.
Clearly nobody knows what the heck is going on. The good news is all that uncertainty leads to lower interest rates on home loans.
That’s how we arrived where we are, with the 30-year fixed now flirting within the 2% range. No, not 2% flat, but perhaps 2.75% or 2.875%, without having to pay some exorbitant amount of discount points.
Okay, so we know mortgage rates are ridiculously low, and also have some idea as to why, so shouldn’t we all refinance NOW?
Hang on. It’s not quite that simple. There are some things to consider here.
Mortgage Rates May Move Even Lower Soon
- Just because mortgage rates are at record lows doesn’t mean they’re done falling
- There’s still a lot of downward pressure on rates at the moment
- And lenders haven’t lowered rates as much as they perhaps could
- If bond yields keep dropping, expect mortgage rates to go even lower
Yes, you read correctly. Just because mortgage rates hit all-time lows doesn’t mean the party is all of a sudden over.
Just ask all the homeowners who refinanced their mortgages last year, or even last month.
They probably thought they struck gold, only to turn around and say what on earth happened?
Apparently, a 30-year fixed mortgage set at 3.50% isn’t good enough anymore, what with rates in the high 2s available with some banks and lenders.
The same exact logic applies now. If you think you’re getting the best rate today, consider the folks who felt the same way six months ago.
Here’s the deal – there’s a ton of uncertainty and downward pressure on bond yields, the stock market, and so on.
The Fed cut rates due to this lack of confidence in global markets, and if you consider the spread between the 10-year bond yield and mortgage rates, there’s more improvement to come.
The 10-year bond yield also just hit a record low, and is now hovering around 1%.
The spread between the 10-year bond yield and 30-year fixed is typically somewhere around 170 basis points, which would peg the 30-year fixed at 2.70%.
Some market pundits see the 10-year yield falling even more in coming months. That all points to even lower mortgage rates in the near future.
Of course, mortgage lenders will take their time and tread cautiously to avoid getting caught out if things all of a sudden turn around.
That might explain why the spread is higher than normal at the moment.
Then There’s the Issue of Lender Capacity
- Mortgage lenders are totally slammed right now
- Many firms are hiring more employees or shifting existing ones to their mortgage department
- There is no shortage of business, which explains why rates aren’t even lower
- Your home loan experience may be horrible at the moment with super slow turn times
This brings us to lender capacity. There are only so many mortgage employees out there. Sure, there might be lots of salespeople, but operational staff might be lacking.
You still need tons of loan processors, loan underwriters, funders, escrow and title officers, home appraisers, and more.
While mortgage lenders try to catch up with demand by hiring more employees, they won’t have much incentive to lower mortgage rates if they’re already slammed.
Imagine if you ran a highly successful pizza restaurant and were running out of food. Would you lower the price of your pizzas? Nope.
If anything, you’d raise the price.
So tying in the point from above, this is another reason why your mortgage isn’t as cheap as it could be.
When lenders are busy, they don’t pass on the true savings to the consumer. Instead, they keep rates artificially higher.
To make matters worse, your mortgage experience might be truly awful right now.
It’s already compared to terrible things like going to the dentist to get a root canal, and that’s on a good day, when lenders might actually have time to return your phone call.
In summary, better things may come to those who wait.