Technology TransactionsWhy Borrowers Should Forget About Market Timing
Picking a loan is a little like picking stocks. If market timing were the way to go, everyone would be as wealthy as stock investor Warren Buffet and have 4 percent mortgages on fantastic homes. But the reality is that even the world"s most successful investor doesn"t expect to buy stock at the very moment it is at its lowest price. While buying low is certainly a fundamental, Buffet chooses investments based on their ability to generate sustainable earnings and growth.
Borrowers should look at homebuying in the same way. While getting a low interest rate on a loan is good, they should also be concerned about other aspects of the transaction. Does acting now enable them to get the home of their dreams? Yet many are sitting and waiting to buy, keyed in only on one fundamental - interest rates.
Tempting these borrowers to further inactivity is the fact that the Federal Reserve just lowered short term borrowing rates to banks again - now at a 30-year low.
Does that mean that mortgage interest rates will go lower? Not necessarily. The two aren"t as related as they seem, but that may bring little comfort to anxious homebuyers who want to beat the mortgage market.
While some economists may expect a slight drop in mortgage interest rates after the Fed makes such a move, it"s more likely that rates will parallel other loan products, namely 10-year Treasury notes.
According to Robert Van Order, chief economist for Freddie Mac, the federal funds rate is for short-term loans, those made overnight by banks to other banks. Mortgages, regardless of their original terms, are kept an average of seven to 11 years by borrowers, putting them more comparable to the risk terms of 10-year Treasury notes. If Treasuries drop by 10 basis points, as they did after the last Fed rate cut of 50 basis points, mortgage interest rates may also drop by about the same amount.
Yet it may be hard to convince some borrowers who are hoping for big point cuts that they are still getting a good loan interest rate at today"s rates. And that could cause them to miss the big picture if they are hesitating on buying a home based on loan interest rates.
Why do homebuyers watch mortgage interest rates so closely? Interest rates dictate how much home a borrower can buy in many cases. The difference of a percentage point in a loan product could be enough to knock some borrowers out of the home or their choice or the neighborhood they want to be in.
And that"s turning some borrowers into market timers - they think they can pick the best time to jump in, and in turn, they may miss other opportunities - a better home or a more favorable sales price.
Mortgage interest rates are a fundamental of the home buying process, but they are only one factor. There are also the choices of homes, neighborhoods, sales price, remodeling costs, terms, loan products, and other variables to consider. To be successful at market timing, borrowers not only have to time the lowest interest rates, but do so while choosing the best loan product available all while grabbing the best house at the lowest price! While it"s possible to do well on one or two points, such as finding the perfect house, the odds of coming out at the very top of all those variables is simply unrealistic.
That"s why borrowers should forget about market timing and jump in when some factors are good, because they will never be perfect. There"s a lot to be said for finding a good home, at a fair price, in a desirable neighborhood.
Borrowers should keep in mind that the difference of a few basis points in interests matter little in the scheme of things. Homebuyers likely won"t be occupying the home for the full term of the loan, and in the meanwhile, opportunities to refinance may arise.
If interest rates should go down, the borrower can have all the fun of trying to beat the re-fi market.