Here are the factors to consider if you have a rate over 6%
Clients often ask us about “timing the market.” In other words, is there a way to get the best price or lowest rate based on WHEN you buy/sell/refinance? Last year we researched historical data of the past decade and posted about the best times of year to buy and sell homes in Sacramento. It revealed seasonal trends that show Winter (not Summer!) is the best season for sellers and Fall (right now!) is best season for buyers. Even Realtor.com supports our research in their own recent report that claims THIS WEEK (September 29-October 5) will be the best week this year to buy a home!
But how about timing a refinance? Is there a way to perfectly time the financial markets to assure you get the lowest possible mortgage rate on a refi? Let’s dive in and discuss!
As you may know, mortgage rates move every day. Much like stock prices, their daily gyrations are unpredictable even though many market experts spend their lives studying and predicting them. But surely there must be a way to know if mortgage rates will go up or down in the near future, right???
WRONG!!! We only need to look back a couple of weeks for clear proof of the erratic nature of mortgage rates. On September 18th, The Federal Reserve officially lowered the Federal Funds Rate by ½%. Many expected mortgage rates to follow suit, but surprisingly mortgage rates actually increased slightly upon The Fed’s actions.
Mortgage rate changes do not have seasonal trends the same way as the real estate market. To prove this, we studied data of 30-yr mortgage rates from the past 40 years, and found that mortgage rates don’t drop more frequently in one time of year over another. We recorded all of the months where mortgage rates fell, and noticed these tallies were evenly spread out throughout the year:
| Season | # of Months w/ rate drops (since 1984) |
| Spring | 73 |
| Summer | 52 |
| Fall | 76 |
| Winter | 77 |
As you can see, there is no season that significantly stands out above another. In fact, Spring, Fall and Winter had nearly the identical number of months that experienced rate decreases.
As an easy visual comparison between the real estate and mortgage markets, look at the rhythmic, predictable nature of the chart on the left showing home sales over the past 10 years (generally peaks in 2nd quarter; bottoms in 4th quarter) to the chart on the right showing 30-yr mortgage rates over the same time period (no pattern whatsoever).
If seasons are not an indicator, then perhaps significant events could be a tell-tale sign for mortgage rate movements…presidential elections, perhaps? Many people believe major elections create uncertainty in the financial markets, and generally mortgage rates fall in times of uncertainty. As a result, we’ve had some clients who could benefit from a refinance today gamble their guaranteed savings of today by holding off on a refinance decision until after this year’s upcoming election. Risky move, especially given the history of what mortgage rates do (or don’t do!!!) in election years.
We looked back at mortgage rates since 1980 and tracked the direction of rates in the months leading up to November. We found that in these 11 presidential cycles, 5 of them experienced rate increases while 6 saw decreases; a mixed bag with no clear trend. Most of these periods saw modest changes, with the average rate change being less than .5% over the 10-month pre-election intervals.
If the sun and moon and stars and elections can’t help us predict interest rates, then what should we look to instead??? Here’s our honest advice…ignore all of the “signs!”
Put away the tarot cards and pick up a calculator! When deciding when or if to refinance, stick to these simple factors:
- What will today’s interest rate save me?
- What will today’s interest rate cost me?
- How long do I plan to have this loan?
Generally speaking, most of our current clients are choosing to refinance if they can recoup the closing costs within 12 months of their monthly savings amount. For example, if a proposed refinance costs $3,000, then it would make sense in most cases to do so if you can save $250/month or more. Doing so is allowing them to save money now, but keep the opportunity to refinance again if rates continue to fall in the future.
While these are straightforward calculations, the pros & cons of a refinance can be nuanced and best talked through with a trusted professional. As mortgage rates have fallen in recent months, aggressive marketing campaigns aimed at pressuring homeowners to refinance have increased dramatically. Don’t let an inexperienced sales call center guide you through an important financial decision; reach out to us to discuss your options.