If you?ve been thinking about either buying a house, or refinancing your current mortgage, there may be no time like the present. According to Bankrate.com, 30 year fixed rate mortgages can be had at rates below 4% with no points. That?s just a fraction above the record low mortgage rates that we had up until last year. And they may not last!
The Fed Wanted to Raise Interest Rates but?
Ever since the late days of Ben Bernanke, the Federal Reserve has been talking about raising interest rates. They even cut back on the so-called QE programs that had been?injecting abundant capital into the markets in an attempt to keep rates artificially low.
So far we haven?t seen much of the promised higher rates, but the potentates at the Fed have made?it clear that that may be their intention (though no one ever knows for sure, because of the Fed penchant for being mysterious, but I digress). But one thing we do know for sure – as one of those cosmic life truths – is that what goes up must come down, and what goes down must come up. And so it will be with interest rates.
Though low rates may have kept the economy from sinking into a depression since the meltdown after 2007, that nonetheless caused other problems. For example, retirees are finding it impossible to get any meaningful return on their money in fixed income investments. This?is?keeping them locked into higher risk equity investments.
Another stock market crash like the last two we’ve?seen already in this century, could send millions of retirees out scrambling for jobs in an already soft job market.
The Perfect Interest Rate Scenario
The current environment is probably the perfect one for low interest rates. Though the economy is growing compared to where it was a few years ago, it?s hardly booming. That helps to keep downward pressure on interest rates.
And?the news?of late has been the rapid decline in oil prices, and by extension, of gasoline. This is a welcome development from a consumer standpoint, not just because it means we pay less for gas, but because it forces inflation lower in the process. This is because oil is a base commodity that has a disproportionate impact on virtually everything in the economy.
The combination of low gas prices and a relatively soft economy is keeping interest rates low, despite Fed intentions to raise them – if that?s even actually what they ever wanted to do.
Why It May Not Last
Okay, so far we have this perfect universe for low interest rates. But for how long? My guess is not very.
The combination of low interest rates and low gas prices may be exactly what?s needed to take this recovery from luke warm to hot. The officialdom may allow this to happen as a means of enabling the economy to finally catch up with skyrocketing stock market ? but again I digress.
Low gasoline prices function as a massive, across-the-board tax cut on the entire economy. Perhaps what?s most significant is that lower gas prices are so democratic in nature. Virtually anyone and everyone ? regardless of income level ? benefits from lower gas prices. It not only means that you will pay less for gas, but likely less for everything else ? or at least less than what you would have paid, had gas prices not fallen.
This will put more money in the hands of the vast majority of the population, and since American?s are infamous for an inability to save money, the windfall might very well ignite a spending spree. Should that scenario play out, higher consumption will ultimately overwhelm lower oil prices, and cause inflation to rise.
Once inflation begins to rise, interest rates will follow suit. And then it will be goodbye historic low mortgage rates.
If You?ve Been Waiting For Lower Rates, It May Be Time to Get Off the Fence
I know it?s not possible to predict highs and lows with any degree of accuracy, but we seem to be in one of those unusual times that are screaming very low interest rates.
How much longer will the low rates continue? We?re probably in some sort of the window right now, and how long that will last is open to debate. My own sense is that the entire country is been waiting to go on a legitimate spending spree for at least a decade and half. After all, the last national spending spree was back in the 1990s during the dotcom boom.
A national spending spree probably won?t go as long as a year before interest rates ? and especially mortgage rates ? begin to?respond by increasing.
Even though very low mortgage rates have been around for several years, the rates we had are anything but normal based on the post-World War II experience. Normal is probably something more like 6% to 8%. We?re at about half that level right now.
The low rates that we have enjoyed the past few years have actually been depression-level rates, intended to pull the country out of a slump. It probably?won’t take much of a national spending spree to reverse that trend, and perhaps to do it on a long-term basis.
Now is an excellent time to get off the fence, if that?s?where you’ve?been sitting for the past few months or years waiting for rates to go even lower. If you plan to buy a house, buy it now. If you’ve been thinking about refinancing, do it now.
I realize that a lot of people are still in negative equity situations from the financial meltdown, but there may be options depending on your situation. For example, if you are a veteran, you can always refinance using a VA loan of up to 100% (or more) of your property value. You an also do a VA streamline refinance that doesn?t even require a new appraisal on the property. Check out a site like LowVARates.com to investigate your options.
Even if your only option is to do a conventional mortgage, there are new developments all the time, particularly in regard to refinances.?One of?the advantages that low interest rates bring is an increase in property values, particularly as the economy improves on a legitimate basis. This is why now may be that window that you need to use to finally refinance your property into a lower payment. Two or three years from now may be too late. Maybe even one year from now.
What do you think? You think we finally, mortgage rates? Or do you think that immediate paying even lower still? If so, what do you think will drive them lower?
We are building a new house next year and hope that these rates hold until it is time to convert the construction loan to a mortgage. We haven’t decided for sure whether to take a mortgage to preserve our investments which currently pay out a dandy 6% on average. We could keep the investments in tact and use the yield to pay the mortgage payments. Or if the rates are higher by then, we could liquidate some investments and pay cash for the house, which of course would lower the income we receive even if the yield remains the same. I like being totally debt free but I also like having that money sitting in our investment accounts. Quite the conundrum.
Hi Kathy – This is just me, but if rates are still around 4% and you’re earning 6% on your investments, I’d take the mortgage. It’s not just because you’ll have a 2% differential in your favor, but also because the mortgage interest is tax deductible. You also have to ask if it will be easier for you to replace the money in your investments or to pay off the mortgage? Some people are better at paying off bills than they are at saving money. But you’re right, it is a conundrum. There’s no simple answer, but the fact that you have the option at all is a very good position to be in!