For anyone who’s thinking about taking out a mortgage, and may be wondering whether the time is right based on fluctuating mortgage rates, this article from The New York Times offers some helpful advice.
It’s understandable why a person might think that the way to understand where mortgage rates are going – and thus whether to lock in a home loan now, or refinance, or whatever major borrowing decision he or she is facing – is to know what is going on inside the brain of Janet Yellen, the Fed chairwoman, and her colleagues. It’s also … wrong.
For most people, trying to parse the intentions of the Fed should play nearly no role in a decision of when to take out a mortgage or other loan. You should make your borrowing decisions based on current market rates and whether they make a given home purchase or refinancing decision affordable or not. Assume that neither you, nor your mortgage broker, nor your Uncle Ned, who watches a lot of Wall Street sharpies on CNBC, has any predictive capacity to know whether rates will be higher or lower a month from now.
Why would this be? Doesn’t the Fed set interest rates? Well, yes. But there are a lot of complexities that stand between that basic fact and the reality of what it will cost you to take out a home loan.
The Fed indeed sets a target for overnight bank lending rates, and buys and sells securities in order to keep market rates at that level. It has kept that rate near zero since the end of 2008, and is now making noises about raising it later this year, perhaps as soon as September.
That’s all well and good, but there are two things to remember. 1) Mortgages are usually based on long-term interest rates, not short-term interest rates, and 2) The Fed is not on some preordained path; rather, its policy will adjust depending on how the economy evolves.
So how should people make the decision on whether to take out or refinance a mortgage? By taking a deep breath, and running the calculations to decide whether they are better off taking action at current prices or not.
