It’s no secret that many people wait for the perfect moment to refinance. The promise of falling interest rates–or the risk of increasing ones–is enough to make a homeowner’s head spin. So what’s the best time to refinance? It might not be when you think.
Much like baking the perfect cookie involves getting the oven timing just right, homeowners looking to refinance just to get lower interest rates often wait for a window of opportunity to open to signify this perfect time: for rates to drop as low as they’ll go before they’ll start to rise again.
Like the cookies, which will come out sticky and raw if removed from the oven too soon, or like charred hockey pucks if removed too late, the Utopian rate-reduction refinance is one that is locked in at just the right time.
While the “wait for the right moment” strategy is ideal, it does pose some risk. After all, no one has a crystal ball to predict what the interest rates will do with real accuracy.
Recent mortgage rate drops prove just that. Despite many experts predicting increases in the first quarter of 2016, mortgage rates dipped to their lowest point in recent years. The truth is, though, that no one knows when the rate roller coaster will begin to head up the hill again.
So, what’s your best bet when it comes to rate reduction refinancing and getting the best rate? According to experts, it’s all about an educated guess.
The Federal Prime Rate Misconception
When most people hear news about the Federal Prime Rate increasing or decreasing, they are usually pleasantly surprised or downright worried. Why?
A low prime rate is great for borrowers, who may have to pay less interest on certain loans (such as credit cards, personal loans, or adjustable rate mortgages that are outside of their introductory rate periods)–but it’s not great for investors, because it means they’ll see lower interest gains on their investments.
While that’s all fine and dandy, many consumers lump mortgage interest rates in with the prime rate, which isn’t exactly the right way to think– at least not directly.
Yes, the prime rate does affect mortgage rates (and the rates of many other financial products), but the correlation isn’t as reliable–or as granular–as it could be, and may not allow homeowners to act in a stealthy enough manner to take advantage of the absolute lowest possible interest rate.
What’s that mean for you personally as a homeowner? In short, it means that the prime rate is worth keeping an eye on–but it’s certainly not the most accurate or time sensitive source of information when trying to make an educated decision regarding your mortgage refinance.
The 10-Year Treasury Bond: What it is and Why it Matters
You may have heard of a Treasury bond–or Treasury note– before, but may not really understand what it is. Let’s clear that up first. A 10-year treasury bond is a debt issued by the U.S. Treasury that has a maturation period of–you guessed it–ten years.
Anyone who has a minimum of $100 can buy a Treasury bond online, at most financial institutions, or through an investment broker. Bonds are usually auctioned to the highest bidders because they have the potential to increase in value while they mature, making them a good investment choice for many people.
The 10 Year Treasury values bonds based on a variety of factors.
The face, or par, value of the bond is the agreed-upon amount that the federal government will pay someone with a bond after the bond has matured. The dollar price of the bond, which is how much the investor pays for the bond at the time he bids on it and purchases it, also affects the overall value of bonds in general.
The interest rate that the government is willing to pay you for holding the bond for the maturation period.
The yield– which is an expressed dollar amount that takes both the applicable interest rate and the dollar price of the bond, is determined as the bonds reach their maturity dates.
The current yield of 10-year Treasury bonds at the date of maturity is the most reliable predictor of mortgage rates that can be considered. In fact, the yield of these bonds is the best multifaceted indicator of the overall health of the economy as well.
As a homeowner, you should pay close attention to 10 Year Treasury bond yields. They fluctuate daily, so it’s important to keep frequent tabs on the bond yields from your local financial institution or from a reputable real-time source such as The Wall Street Journal.
The Best Time to Refinance
When the 10 Year Treasury bond drops, it’s a good indicator that mortgage rates will quickly follow. Looking at the bond yield over a long period of time–say, at least a year–will give you a decent idea as to whether or not it’s going to dip lower.
So what’s the bond doing now and how will the 10 Year Treasury bond yield affect mortgage rates in the coming days, weeks, and months? At the time of this post, it appears to be trending downward.
However, the recent spike in the prime rate does loosely indicate a gradual and eventual increase in mortgage rates, so now just might be the most opportune time to refinance, if history holds any clues.
Protect Yourself with a Rate Guarantee
For many homeowners, knowing exactly when to take the leap to take advantage of the lowest mortgage rates available when it comes to refinancing is the hardest part.
It’s true–choosing to lock in your rate today versus a month from now is always a slight risk. That’s why it’s extremely important to look at the bigger picture and not just rates in their current standing.
One thing is pretty certain–it’s simple to tell when it’s a good time to refinance in general. But for those who like a little extra peace of mind, a few mortgage companies offer a loan rate guarantee, which will protect you if rates should fall further after you refinance.
For example, NLC Loans’ 5 Year Rate Guarantee protects homeowners for five years following the closing of their loan. In other words, if mortgage rates dip lower at any point during the five years after a loan is closed at NLC Loans, the company will foot much of the cost– the appraisal and origination fees– for you to refinance again at the lower rate.
This protects homeowners by assuring that they won’t have to shell out a ton of extra money if rates do, indeed, drop beyond whatever they were locked in at when their customers refinance.
Ready. Set. Low!
If you’re ready to see if now might be the perfect time for you to refinance your home, give a licensed Personal Mortgage Advisor a call for a no-strings-attached mortgage consultation at 877-480-8050 or submit a request here and we’ll call you back.