As Low as They Go? Maybe So...

Despite well-understood economic forces exerting an upward push, some people think mortgage interest rates will decline further. When confronted with this view, however, I disagree. In fact, I’m reminded of a remark once made by Bertrand Russell. He observed, "The fact that an opinion has been widely held doesn't mean it's not utterly absurd."

I don’t think interest rates can get much lower than the range they’ve been in recently. As for my logic, here’s why…

Our government has two powerful options when it comes to servicing the $11 Trillion in debt it’s run up over the years. It can (1) print money and (2) tax the public. Given such infallible resources, Uncle Sam has very little (if any) concern about the rate of interest it must pay for what it borrows. Stated differently, our government currently has no choice but to (and can) pay whatever price necessary to rent money from the marketplace, and the cost of doing so has become—quite literally—irrelevant.

In addition, to attract capital, Uncle Sam must offer a higher rate of return on its bonds than that provided by mortgage-backed securities (the primary means by which money is raised for use in making home loans). Therefore, when the government ratchets-up the rate it pays on its bonds (e.g., to a point higher than that offered by mortgage-backed securities), the inevitable result will be that mortgage-backed securities respond by offering a return even higher than that. Ultimately, this competition will cause interest rates on Treasuries and mortgage-backed securities to spiral upward as each form of investment tries to make itself more attractive to the marketplace than the other.

All this being so, the question everyone asks me nowadays is: “Should I [buy/refinance] now, or wait?” I used to reply, somewhat wryly, that I could definitely narrow things down to one or the other… However, at this point in time, I’m telling folks they shouldn’t get too fancy, and here’s why…

Let’s say a borrower has a $300,000 mortgage balance bearing 6.00% interest over 30 years. Currently, the principal and interest portion of his monthly payment is $1,798.65, and he has the opportunity to refinance at 5.00%. Let’s also assume the borrower is hoping rates will drop to 4.75%, and he doesn’t intend to refinance until they get there. At 5.00%, his monthly payment would be reduced by about $188.00 to $1,610.46, and, at 4.75%, it would be reduced some $45.00 more to $1,564.94. See what I mean? By waiting to try and save an extra $45.00/month, the borrower risks rates moving in the other direction…

In the final analysis, if you’ll permit me, “Pigs get fat and hogs get slaughtered.” Sure, it’d be neat if everyone could time the market perfectly, but I don’t see much chance of this becoming the norm. Therefore, to resort to another cliché, I’ve begun to suggest that people remember “a bird in the hand…”

EchoPoint Mortgage Company / CSW Home Loan
Phone: 214.559.0277
Email: info@cswhomeloan.com
Website: www.cswhomeloan.com
Blog: http://echopointmortgage.blogspot.com/

EchoPoint Mortgage Company dba CSW Home Loan is not an accounting or law firm, and neither it nor any of its officers, directors or employees provide tax or legal advice. Before making decisions that might have tax or legal consequences, you should consult your tax or legal advisor.