I've been thinking about refinancing my mortgage, but I'm not sure if I should wait a week or two for better rates, or lock in what they are offering today. How can I make an educated guess?
Obviously you can't predict the future too much, but it's not too hard to figure out what is going to happen to mortgage rates in the short term.
Mortgage rates are heavily influenced by 10 year treasury yields. You can find the daily 10 year rates here. It's easy to see the direction they've been moving recently. It usually takes a few days for mortgage rates to follow if the 10 year treasury yield is dropping (although if it's going up, mortgage rates will go up faster than they will fall).
Here's a sample of all the 10 year treasury yields for the past 10 years. Looks like a good time to get a mortgage or refinance!
You can also take a look at movements in mortgage backed securities. Here you can find a chart for Fannie Mae 3.0% mortgages.
As the price goes up, mortgage rates go down. Think of it this way. Right now people are will to pay $103 for $100 worth of 3.0% mortgages. That doesn't really make sense because I could just loan you $100 at 3.0% and turn around and sell it for $103 immediately, pocketing the $3 profit. The reason is because right now, no one would willingly borrow money at 3.0%. Rates have fallen so much that if a bank has a customer paying them 3.0% on a mortgage, other people are willing to pay a premium on that mortgage. New mortgages are probably being written for 2.0%. (There is no current mortgage backed security for 2.0% fannie maes because rates have never been this low before).
Mortgage rates generally consist of two factors:
- The price of money - that is, interest rates in the overall economy. (Your mortgage is essentially a purchase of money. You will pay interest on that money over time: that is the price of the money. The fact that you buy a house with the money is kind of incidental.)
- A small, typically-competitive premium to cover the work that the bank does
- An extra premium to cover the risk associated with making the loan (higher credit score, lower rate).
The risk premium is relatively constant for a particular individual / house combination, so most of the changes in your mortgage rate will be associated with changes in the price of money in the world economy at large.
Interest rates in the overall economy are usually tied to an interest rate called the Federal Funds rate. The Federal Reserve manipulates the federal funds rate by buying and/or selling bonds until the rate is something they like. So you can usually expect your interest rate to rise or fall depending on the policies of the Federal Reserve.
You can predict this in a couple of ways:
- Financial institutions who worry about changes in interest rate affecting their businesses may trade options so that they can reduce their risk of interest rate shifts. From this you can determine what financial professionals think the Fed will do. The Fed will actually collect that information and present it to you in an easy-to-digest form: http://www.clevelandfed.org/research/data/fedfunds/
As of this time, the charts are all very boring, but they have an orange line at y=1.0 labeled
0-0.25%- this implies that pretty much everyone expects rates to remain low through September.
- The Federal Reserve will from time to time release information about its general plans for interest rates. This will be reported in various newspapers. You can also access information about their meetings at their monetary policy page: http://federalreserve.gov/monetarypolicy/default.htm
The way they have described their plans recently indicates that will keep interest rates low for an extended period of time - probably through 2014 or so - and they hope to keep inflation around 2%. Unless inflation is significantly more than 2% between now and then, they are extremely unlikely to change that plan.
As such, you should probably not expect mortgage interest rates in general to change more than infinitesimally small amounts until 2014ish. Worry more about your credit score.
If economic conditions are weakening, i.e. unemployment rising, business and consummer confidence dropping, etc., you can expect interest rates and thus mortgage rates to drop. If economic conditions are strengthening you can expect interest rates and thus mortgage rates to start rising.
As you are in the US, and with official interest rates there at 0.25% there is not much room for these rates to fall further. I am in Australia, with official interest rates at 3.75%, and with the economic weakness in the US and Europe and with China slowing down, we can expect our rates to fall further over the next year.
Regarding your timeframe of one to two weeks, unless there is a decision on rates in the US in the next week I don't think there would be much change, especially with rates there at record lows. You are probably best to shop around for the best rates now and refinance once you have found one you are happy with.