Sunday, February 10, 2008

Is It Time to Refinance Right Now?

Various factors go into a decision to refinance, but I'm just looking at the interest rate factor. We know rates are going down, but where is the bottom?

The Federal Reserve controls short-term interest rates, but mortgage rates are longer term and are set by the market (certainly influenced by the short-term rate, but the market also looks ahead to anticipate where the short-term rate is likely to move). The 30-year mortgage rate is more or less correlated with the rate of the 10-year Treasury note. There are a couple of ways to track and chart this.

One place the price movement of the Treasuries can be seen is on a chart of the iShares 7-10 Year Treasury Bond Fund. This is an ETF (Exchange-Traded Fund) that trades just like a stock, and the symbol is IEF.

The thing to remember is that when this ETF goes up, interest rates go down, and vice versa. So when it starts to go down below its uptrend, then mortgage rates have turned up.

Alternatively, the interest rate of the 10-year Treasuries can be charted directly. Most software and sites that I have seen use the symbol $TNX for this. Of course mortage rates are always higher than Treasuries, but again they move more or less together.

How do you know when the rate is is bottoming (or equivalently, the price is topping)? This is always the $64,000 question, and there are almost as many techniques for projecting this as there are analysts. Nobody can really tell for sure, but here are a couple of things to look for:
  • If you see IEF suddenly spike higher (or $TNX spike lower), which quickly reverses the same day, you are quite possibly at an extreme point that will not be exceeded for a while. Instead of waiting to see if it is exceeded, you might want to lock in that rate immediately (that same day if possible). The bird-in-the-hand benefit of getting the lower rate sooner, may very possibly outweigh the two-in-the-bush chance of getting a better rate later on.

    I watched for a spike and did this in 2001. As it turned out, I could have gotten a somewhat better rate if I'd waited 6 to 24 months, but I didn't know that -- and then I wouldn't have had the benefit of lower payments during those months.

  • You can look at a chart with trend indicators, and wait till IEF drops below its uptrend (or $TNX breaks above its downtrend). For instance, at the date of this writing, if you chart it with 21-day and 50-day exponential moving averages (EMAs), you'll see that since July of 2007, IEF has briefly dropped below the 21 on several occasions, only to rise again -- but has not really dropped below the 50. So the 50-day EMA seems to be a decent trend indicator, for now at least.

  • You can also look at the MACD indicator, which I've talked about before.

Here's an example chart of IEF, and an example chart of $TNX with these indicators. Note the IEF price is well above (and $TNX is well below) both moving averages, but the MACD's black line has crossed over the red line. That's a clue that mortgage rates might not get any better, for a little while at least. The chart shows that the last time this happened, it took several weeks to see better rates. So maybe it's time to consider that bird in the hand.

(Note: The above was originally written before the rate spiked sharply on Feb. 7. The values in both cases temporarily crossed the 21-day EMA, but not the 50.)

On the other hand, this period might be like December, where the rate hovered around the same area much of the month, only to fall further in January. Looking at the $TNX chart, when the MACD rises without the rate itself rising very much, it's a sign that this might be about to happen. Compare the MACD since about January 23 with its behavior in December, and you'll see the similarity.

So it's up to you. As Clint Eastwood says in Dirty Harry, "You've got to ask yourself one question: 'Do I feel lucky?'" If so you might wait a little longer, and keep an eye on those EMAs. In the meantime, shop around, decide where you want to get this loan, and find out what they need in order to lock in a rate.

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Sunday, February 03, 2008

Falling Interest Rates and Your Mortgage

Well, I've been so busy recently that I haven't posted. December often seems to be the busiest time of year -- and now it's time to do taxes.

I hope readers were able to take steps in advance, to profit from the lower interest rates as outlined in the last post. The economy and markets are weaker than most people expected, and the Fed has decided they'd better come to the rescue with aggressive rate cuts. Even with the two recent cuts totalling 125 basis points (1.25 percentage points), it's quite possible they will cut again at their next meeting in late March.

Although the economy won't really feel the effects of rate cuts for a few months, it's already helping some people as they rush to refinance their mortgages. It's helping others who have adjustable-rate mortgages because their rates won't adjust as high as they otherwise would.

By the way, I hope everyone has learned the lesson: When interest rates are low, it's not time to get an adjustable-rate mortgage. (In which direction do you think those low rates are gonna adjust?!) Even if rates are fairly high, it's a risk, and not to be taken lightly. Don't stretch to buy more house than you can afford, don't finance 90% or 100% of the house value, and make sure your mortagage doesn't have a prepayment penalty. Don't even buy a house unless you have a good emergency cash fund. These rules are basic, yet an enormous number of homeowners ignored them -- and are now paying the price. We all are paying with them, as neighborhoods become saturated with foreclosures, lenders become reluctant to make new loans, and the economy slows.

In other words, there's a lot to be said for the traditional fixed-rate mortgage. As interest rates fall, get ready to refinance if you can get a better rate, or if you currently have an adjustable rate.

Next time: Is it time to refinance right now?

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