How to Time the Interest Rate Market

Mortgage interest rates have been fluctuating recently. This is not talked about a lot in the media, but  in the last two weeks, there was a large dip in interest rates, followed by a large surge, and then a slight decrease again.  

In this article, I will explain what is causing these fluctuations, and more importantly, I will explain what you can do to catch the market at a good time.  

Why interest rates fluctuate:

Unlike what most people believe, mortgage interest rates are not the result of the actions of the Federal Reserve (at least not directly). The Federal Reserve sets the rate at which very large banks lend money to each other. This then influences the rate at which large banks lend money to smaller banks, and this influences the rate at which those smaller banks will lend money to the public. This affects the interest rates on credit cards, personal loans, and Home Equity Lines of Credit (a type of second mortgage).

But there is an even more important influence on mortgage rates: the market for a type of financial investment called “mortgage backed securities.” These are bonds (financial instruments, like stocks but different, that you buy and that pay you interest over time, eventually paying off the initial purchase price, plus interest on top). These particular types of “mortgage backed security” bonds consist of a lot of mortgages (think thousands of mortgages) bundled together and paying the holder money over time, eventually amounting to the purchase price, plus a lot of interest on top (the interest that you pay on your mortgage as a borrower). These bonds are bought by very large investors, like pension funds. Most mortgages that are offered to borrowers by banks and other lending institutions end up being resold to these types of investors as part of a mortgage backed security bond.

When there are a lot of investors who want to buy mortgage backed securities (MBSs), the price of these goes up. When investors are less interested, the price goes down. Mortgage rates do the opposite of the MBS bond prices, i.e. when the MBS price goes up, mortgage rates go down. This is because when the MBS price goes up, banks are interested in selling more mortgages to investors, so they put the mortgage rates down so that more borrowers can and will take out mortgages.  

This is all a very delicate balance that can be influenced by many factors, including international movements of money from international investors, and the price of competing bonds (such as Treasury bonds). Another thing to know about this is that banks do not react to changes in the market in real time—they actually anticipate them. So if banks expect that the MBS bond market will go up, they will lower mortgage rates in anticipation. This anticipation can take place as much as a month or more in advance of events actually happening or not happening.

How you can time the market:

Right now, the market is continuously going up and down in the short term, although the long-term expected trend for mortgage rates is up. Even when the market is relatively unchanging, interest rates on specific loan programs change multiple times per day, so even the time of day on a specific day can make a difference. Many of my borrowers know that they need to buy soon but they are concerned about catching the low in the short term.

Let me start by saying that you can never completely time the market except through sheer luck, and pursuing the absolute low of interest rates will result in failure 99.999% of the time, so don’t set yourself to steep a target. But I do have some advice if you are trying to make a decision about when to lock your mortgage rate when it is continually fluctuating:

Be ready to lock that interest rate when it (temporarily) goes down.

And this is what I mean by “be ready”:

• Have your credit score in order. (Self-employed borrowers often have a slightly lower credit score than employees. We routinely work with our clients for three months or more to help them increase their credit score, as part of the loan application process.)

• Get a soft pull done on your credit report and get any fixable items on your credit report fixed. (We help our clients do these soft pulls without any impact to their credit score and get these items fixed as part of our standard loan application process.)

• Have your loan application filled out, with all questions answered and ready to be submitted to a lender. (It takes a loan officer two or three hours just to administratively create and fill out a loan application file, even when all information is provided. Make sure to give your loan officer enough time to get this done and also to collect any additional information from you or smooth out any snags. Also, the loan application file has to be submitted to the lender and processed by them before it can be locked, which can take an additional bit of time. Give yourself a few days from the moment you say yes to your loan officer to the moment you intend to lock you rate with the lender.)  

Once these items are in place and the loan is ready to be locked is ready to go, you can still take your time and wait for the moment of your choosing. In fact, when it comes to mortgages, you are never on the hook for anything until you sign the final loan documents, so there is no harm in doing all the preparatory work and being prepared.

The item that takes the longest, from our experience with borrowers, is to fix fixable items on the credit report and improve the credit score. We routinely work with borrowers on these for three months or more. For this reason, I advise people that the ideal time to contact us if your are even thinking of doing any kind of mortgage transaction is six months in advance, or more.

In some cases, I have worked with borrowers over a period of three years before they were ready.

We are a relationship-based business, in fact I get 90% of my loans from referrals and repeat clients. We are very service-oriented and enjoy providing information and helping people with preparation. My hardest job is to convince people that they are not being a pain in the *** or “wasting my time” when they ask for information or simply want to get prepared for future transactions without actually being ready to move forward. This is a completely routine part of my job, and I very much enjoy spending time with people on this.  

I recently had a very clever client who is a financial advisor, and he anticipated that a drop in interest rates was coming. He did everything to get prepared and have the loan application file ready and submitted. When the loan was ready to be locked, we discussed it, he decided to wait for a bit and then when the drop came, we were able to lock it within a very narrow margin of the actual bottom low. Within hours, rates shot up again, and he was able to take advantage of a very temporary but substantial rate drop compared to the rates of the last few months. This was only possible because he prepared well in advance.

So let me know if you’re ready to make an application, or if you would like to discuss a possible scenario that may be three months, six months or even a year out, or if you would like to discuss goals and dreams that are at this point even completely hypothetical.

I am here if you need any help.