Mortgage rates: Can you time the bottom?

November 09th, 2010

Everyone wants to hit the bottom of the market when buying and the top of the market when selling. Right now you may be waiting to time the bottom of the mortgage rate market for your refinance or new home loan. When you find the bottom of the market, can you let the rest of us know?

Gauging the bottom

How will we know when the bottom of the mortgage rate market is at hand? Looking at mortgage rate graphs it appears the bottom for the past few decades, so far, was sometime the week ending Oct. 14 when Freddie Mac’s benchmark 30-year fixed rate average was at 4.19 percent. Since then the 30-year rate has steadily inched up week after week. If you entered rates from the week of Oct. 14 into your mortgage calculator but did not lock in your rate, did you miss the bottom of the mortgage rate market?

How and when will you know if in fact the bottom of the market has occurred? The nightly news or a mortgage blog such as this one will not let you know; there are no headlines “Mortgage Rates Hit Bottom Today…Due to Rise” announcing the bottom. If you are trying to time the bottom of the market, what will let you know that today, tomorrow or next Thursday is the day?

Pinpointing the bottom of any market is inherently impossible. Experts try to anticipate the bottom before it happens, saying “we seem to be near the bottom of this market” or speculate when rates begin to rise again, “it appears we may be past the bottom of the market.” But there’s no way for anyone to accurately say, “today is the bottom of the market.”

The bottom of a market is usually not known until weeks, sometimes months, after the bottom has been hit and the market has moved on. And then who knows, it may come again — the bottom that is. Looking at the stock market for the past decade, there have been many troughs where it appeared the bottom of the market had come and gone — March 2001, September 2001, July 2002, October 2002.

With each “bottom” the market rose and then it dropped again. Following the big drop in the fall of 2002 it was up, up and away until…the fall of 2008. For the record, it appears the bottom for the past decade was in March 2009 when the Dow Jones hit a ten year low. Did you time the bottom on that day and buy a lot of stock? Probably not, but you probably didn’t lock in your interest rate the week ending Oct. 14 either — few did, so don’t feel bad.

Does the bottom matter?

While you are using the refinance calculator to determine how much you are going to save when the mortgage rates hit the bottom you know they will hit — and when they will hit — calculate your savings if you just miss the bottom. Input a slightly higher mortgage rate, say a bump of 0.125 points, and calculate how much you will save on your monthly payment. Then try a bump of 0.25 points higher than where you feel the mortgage rates will bottom out. You will most likely find that there’s not a tremendous difference in the savings for an eighth or a quarter percent in rate.

While waiting for the bottom of the mortgage rate market that you may or may not have already missed how much have you lost in monthly savings by waiting? Using mortgage calculators with various rates you can see that a small change in rate does not have a big impact on your monthly mortgage payment. What does have a big impact is not taking advantage of the savings available.

Coulda, woulda, shoulda

What if you ran some numbers through the refinance calculator a couple of months ago and found that you could save $250 per month on your monthly mortgage payment, but you decided to wait longer for the “bottom”? Since early September, mortgage rates have declined approximately 0.08 percent, or a little less than one-tenth of a percent. Let’s suppose you are lucky enough to lock in at the true bottom of the market — let’s say it’s 4.00 percent on the Freddie Mac average in January.

Assume you could have saved $250 per month by refinancing in September. By January, four months later, you would have saved $1,000. The difference in payment on a $250,000 loan between refinancing in September at 4.32 percent and in January at (say) 4.00 percent is $46 per month. In waiting the four months to refinance you have spent $2,500 to save $46 per month. It will take you almost two years in incremental monthly savings, $46 per month, before you save what you would have saved by refinancing in September. That is if you hit the bottom, but what if you miss? Is it worth it?

No one knows when the bottom of the market will occur, or if it has already. If you find using the mortgage calculators at today’s historically low rates that you can save on your monthly mortgage payment or purchase your new home with an affordable payment for which you qualify, don’t wait — the bottom may have already come and gone. Regardless, the longer you wait the more of your money goes out the door.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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