The mortgage market has been favorable to borrowers for over a year. With rates hovering around 3%, now is a great time to get a new loan or refinance your existing loan.
However, the downward trend has led some borrowers to question the timing of the market. Especially during times when rates seem to be steadily falling – as they have been for much of April – is it beneficial to wait for a drop?
Essentially, the answer is no, it is not. Here’s why.
Waiting for prices to drop may not be profitable
“The rates are so unpredictable,” said Ken H. Johnson, real estate economist at Florida Atlantic University. “If the current rate is 3 and you are happy with 3, you need to pull the trigger.”
Prices are constantly fluctuating and it may be impossible to predict where they are heading, even for the most discerning consumer. In fact, he said, even mortgage experts rarely agree on the direction of rates, as evidenced by the weekly Bankrate poll.
“You just don’t know which direction the prices will go next,” Johnson said. “Because you don’t know where the rate is going, you can’t answer the question you just asked.”
How quickly are rate changes incorporated into loan offers?
This is another reason why market timing is so difficult: Rates are constantly changing and can be affected by different variables.
“Our residential mortgage markets, our mortgage backed securities, our financial markets are so efficient that the prices are instantaneous,” Johnson said. “There is no time lag,” he added. “You can’t guess it.”
This variability can make it especially difficult for borrowers to know if they’re getting the best deal, and that’s why Johnson said he doesn’t pay to wait for the lowest rate possible. Instead, he said, you should just go with a rate that will save you money and get your up-front costs back in a reasonable amount of time.
How much money is at stake?
The possible interest savings depend on the amount of your loan. But, with rates still close to their all-time lows, loans with even higher interest rates in today’s market are relatively cheap, and the difference may be as little as a few tens or hundreds of dollars per. months – maybe a few thousand dollars over the lifetime. of the average loan.
This is why Johnson once again insisted that accepting a mortgage is more about how the terms of the loan fit into your personal financial situation, not getting the absolute lowest rate. .
Could a floating mortgage help?
A floating mortgage is basically an agreement with your lender to pay a fee once you lock in your rate, which allows you to get a lower rate if the market pulls back before you close.
Often, you have to pay the fees up front, even if you end up keeping the same rate. Much like market timing, it can be difficult to know if this is a good deal, and you won’t be able to calculate your breakeven point until you know what your new rate will be.
Ultimately, you need to do your own cost-benefit analysis and decide if the fees your lender charges for the float are worth it for potential savings.
Is the timing of market refinancing different from buying a new home?
Not really. In a refinance or new mortgage case, the key question is whether the terms of the loan are suitable for you and your own finances. However, it can be a little easier to calculate the benefits with a refi because you know how much you are paying on your current loan.
Johnson said the biggest problem for buyers in today’s market is that high demand has pushed home prices to a point where they have wiped out much of the savings generated by low mortgage rates.
He calculated that rates falling to 3 percent from 4 percent last spring meant borrowers could afford to take out loans with about 13 percent more principal at the same overall cost.
Now, he said, house prices have appreciated beyond that 13% threshold.
For example, Johnson said, “You would have been better off buying at $ 100,000 and 4% than $ 113,000 and change and 3%.”
At the end of the line
It is simply a guess to time the market and stand out in a refinance or a new mortgage. That doesn’t mean you can’t save while you wait, but you also risk losing with constantly fluctuating rates. For most borrowers, it makes more sense to analyze your finances and accept a loan that you think is a good deal, even if it doesn’t have the lowest possible interest rate.
One more thing to know: Pretty much all rate watchers believe mortgage rates will rise throughout this year and into next year as the economy recovers from the pandemic.
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