How Long Should I Wait for Interest Rates to Drop?

Question: How Long Should I Wait for Interest Rates to Drop?

A reader asks: "I am a single woman buying a home. This will be my first real home. To help offset part of the increased expenditure I will experience via home ownership, I plan to rent a third bedroom to a roommate, reserving two of the bedrooms for my own personal use. The last part of the equation is how low my interest rate should go. I read your article about interest rates versus sales prices. I understand every half point drop increases my buying power. But interest rates have been the same every day for a week now. How long should I wait for interest rates to drop?"

Answer: You sound like an astute first-time home buyer. A woman who has carefully studied the home buying process and knows what she wants. However, there is something to be said about being too analytical about home buying. In part, that's because home buying involves almost equal portions of emotion mixed with common sense. Many home buyers let their hearts lead but the head signs on the bottom line.

How Far Do Interest Rates Drop in a Day?

Interest rates change throughout the day, sometimes hourly. People make the mistake of believing that interest rates are determined by the Fed or reflected by Treasury bill rates, and both of those beliefs are incorrect. Mortgage backed securities cause interest rates to fluctuate.

If the Fed cuts the short-term discount rate, that could cause a rally in the stock market. Investors might sell off mortgage-backed securities to buy stock. The sale of mortgage-backed securities could cause interest rates to go up. Generally, rates do not move more than a half-point or so per day, but the movement could be greater depending on any number of actions.

A terrorist attack such as the day the Twin Towers fell on September 11, 2001 caused the New York Stock Exchange to close. Because planes were grounded, checks did not clear. This had an impact on our financial markets. However, if the United States declared war against, say, a small county in the Middle East, you can bet this action would have a volatile affect on interest rates. Investors could turn to more profitable returns through riskier investments. Or the stock market could fall in reaction to uncertainty.

There is a correlation between the stock market and interest rates. If the stock market is rising, interest rates might fall, but not always. In other words, there is no reasonable way to accurately predict how interest rates will move. It's like trying to time the real estate market. It's a moving target.

If Your Interest Rate Works for You, Don't Wait for Rates to Drop

There are serial refinances in this world who turn to mortgage refinancing every time an interest rate drops by half of a point. They don't seem to realize that they pay loan fees and expenses that amount to about 2% to 3% of the mortgage balance every time they refinance. This can cost a lot of money and eat into your equity.

However, it is human nature to want to get the best deal. I had to laugh out loud when I last refinanced my mortgage into a 15-year fixed-rate term. My interest rate was extremely low and my mortgage balance was pretty small. Yet, still I watched with interest every day to see how the rates moved. I was hesitant to lock a loan, just in case interest rates inched an 1/8th of a point lower.

That difference of an 1/8th of a point was so insignificant in the overall scheme of things, I could not believe that I had fallen victim to the same behavior I warned my clients about. When I realized what was happening to me, I let my common sense take over. I locked my interest rate and did not check the rates again until I closed. At that point, rates had moved up a little bit. But even if they had declined further, it would not have meant that I made a bad choice.

The truth is you do not need to squeeze out every nickel in a transaction to get a good deal or the best mortgage available. Choose your mortgage broker with care, find a lender you trust and respect. Your lender can help guide you to choose the best time to lock a loan. After you have locked your loan, live with your decision. If for some odd reason interest rates were to dramatically drop, most lenders will work with you to keep you from canceling your commitment.

_{At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.}