Any downtrend in rates brings temptations and pressures to both professionals and civilians.
Hence, a series of rules cribbed from prior declines and adjusted to this one.
[graphiq id=”5vkQjNOAFN3″ title=”30-Year Fixed Rate Mortgage Rates for the Past 6 Months” width=”600″ height=”400″ url=”https://w.graphiq.com/w/5vkQjNOAFN3″ link=”http://mortgage-lenders.credio.com” link_text=”30-Year Fixed Rate Mortgage Rates for the Past 6 Months | Credio” ]
The rules:
1. The most powerful is the most obvious, and hence the most overlooked: The downtrend is in the past, and the stronger and deeper it has been, the less likely to continue. Rates have fallen from 4.25 percent to almost 3.50 percent in six months, when at the outset 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? 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 works, lock it, and get it done on time.
3. Never trust to faith that if rates rise, a compliant lender will extend your deal. Assume that in any rate decline, lenders will become too busy, their process congesting into gridlock.
At the outset of locking, extract not only a promise to perform 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 keep the difference, but not so: every rate lock triggers a chain of rigid hedging all the way to Wall Street and beyond, in which every player wants and needs nothing more than the original lock to close, no extra money made.
5. When 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 cost of money is still, after one hike, only 0.25 percent to 0.50 percent, but long-term rates all over the world have collapsed upon short-term ones.
Short-term ones can’t go any lower (the overseas ones below zero will struggle to go any farther so). Even the classic 5-year ARM is holding about 3.00 percent, and it does not make good sense to take rate risk to pick up today’s little more than half-percent below long-term fixed.
6. A financial-planning decision with different aspects in every family: whether to take advantage of super-low rates to refinance or buy with a 15-year loan? I am opposed, except in two cases: those too frightened to invest, and those who have difficulty saving.
All others…begin with this question: If rates are an inch from an all-time low, why be in a lather to pay back the money? On 10-year horizons, you can’t find a time when a diversified group 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 in 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 out of the room. Except when it is different. Now. Right now.
The principal reason for this year’s decline in rates — and the long wave pushing down for decades — is the combination of a rapidly aging world and too much debt, never seen before.
If your population and economy are growing faster 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 careful out there, but odds favor lower rates to come. Slowly and with volatility, but those are the odds.
Follow the rules.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
