Interest Rates Can Go Up Too

There is always another bus, right? So why not wait for the next one? I am not sure I agree. The next bus may be broken down, or out of gas, or delayed beyond a comfortable waiting period. But I am not talking about a bus, I am talking about a refinance. I hear rates are going down 1% a week, and soon banks will be giving away money for free. Do not refinance now because mortgages will be free soon if you wait. And if you wait long enough, banks will even pay you to take a mortgage. Is this true? Come on! You know my sense of sarcasm. No, it is not true. But this is what people seem to think now. Banks are already giving away money almost. Take a 3.50% fixed rate mortgage and deduct inflation, that is some cheap money!

About 2.5 years ago in the Fall of 2009, I wrote a blog here that talked about how rates were indeed dropping, but that people seemed to aggressively think rates were plummeting rapidly. In fact, the truth was rates were down about .375% from the previous high. A nice dip, but hardly a plummeting. Rates for a Conforming 30 Year Fixed were in the low 5’s and were headed into the high 4’s, hence about a .375% drop. Now they are in the middle 3’s. So we have dropped, over 30 months, about 1.50% to 1.75%. That is about 1/8% every 2.5 months. So how people figure rates are going from 3.625% for a Conforming 30 Year Fixed to 3% if they just wait another week or two, I have no idea.

This is a perfect example of herd thinking. The TV says rates are dropping, the radio says rates are dropping, the neighbors say rates are dropping, and everyone you bump into says rates are dropping. They are all experts. So rates must be plummeting daily, because you hear about it daily! But the truth is you are hearing the same story, repeated several times a day, so it makes the magnitude of the event sound much greater than it is. If I said I was the most handsome man in the world a million times, it would not make it true. When I say it once its laughable, a million times more…it’s still just as funny. So why does a finance story that repeats itself seem to make the event come true in people’s minds, but not in reality?

The truth is rates have come down over the last few weeks about .375%. This is great for the consumer, and great for people to save money. But it is hardly the PLUMMETING thay everyone is hysterical about.

Rates are at the lowest point now in U.S. history. Period. Ever. Never lower. This is historical. This is amazing. Yet people act as of rates are headed to 1% or 2%, so people want to wait for more. We are at the lowest rates in the history of EVER! And people want to wait for more. We just set a 222 year record, and people want to wait for more. The interest rates the U.S. paid in 1776 to finance the Revolutionary War were around 6%. To finance the Civil War the Union paid rates in the 6% to 7% range! We all know in 1981 rates hit 17%, 18% and even 19%! What are we waiting for? Refinance!

Rates have been going down for a few years now, and since people think in a linear fashion, they think rates will keep going down. When the stock market was at 14,000 it was headed to 30,000! Remember? It was never going to fall again. That is when it tanked, and headed down into the low 6000’s. No one believed it on the way down, but when the DOW hit 9,000 , then 8,000, and then 7,000; people thought it would never stop and were scared to death. Remember? We thought the world was collapsing. Then it turned around.

So now that everyone in the world thinks rates are dropping more and more and more, is it time for a turn around? I don’t know. I think the economy is weak enough that rates won’t spike. But how can rates go much lower from here, after we just set new 222 year precedent!? And if entities (individuals, municipalities, countries) start defaulting on debt because the economy gets weaker still, rates will spike because the entities that hold debt as an asset will start selling their debt off, and rates will spike because not as many people will want to hold debt paper, unless they are offered higher yields because of increased defaults.

But people still want to wait for rates to drop more! I think you can guess what my advice is. I believe we are bouncing along the bottom, and although I certainly do not see rates spiking, they are not going down 1% a week, and if they are headed lower, it may take years to get there given history. And rates have actually bumped up a bit from the lows a few days ago. So if you can get a decent refi where you save a decent amount of money per month, and can achieve a short recapture period on the closing costs of around 12-18 months, then go for it, don’t get greedy and keep waiting for more. More may not come. There may not be another bus.