Will Rates Go Even Lower?

 In Refinancing your Mortgage

Many people call us to refinance their mortgage, and the one thing just about everyone asks is whether interest rates will go even lower than they are now.  

Here’s what you need to know.

Interest Rates

Mortgage interest rates typically follow the US Treasury bond yield, which is the interest rate you get when you buy a 10-year US bond.  However, because conventional mortgage bonds are riskier than US government bonds (because they are not guaranteed like US bonds are), the interest rate for mortgages is always higher than it is for US bonds.  That’s because the purchasers of the bonds won’t buy them if they don’t pay a higher interest rate to make up for the additional risk.

When US bond interest rates fall as low as they are right now, many people believe that mortgage rates will be as low.  However, that isn’t true, and here are the three main reasons why.

Risk

The first reason has to do with the risk involved.  No sensible investor is going to settle for as low a yield on a risky investment as they are willing to accept on a guaranteed investment.  If you lend money to someone, and they tell you that they can’t guarantee that you will be re-paid, you are going to want to get a higher payment each month before you lend them the money.  That’s exactly how bond yields work. If they are guaranteed, the yields are lower than the yields on investments that aren’t guaranteed. So mortgage rates (which aren’t guaranteed) will never be as low as the rates for US bonds (which are guaranteed).

Workload

The second reason mortgage rates will not go as low as US bond interest rates is because lenders just can’t handle all the work they have when US bond rates drop to levels like they are now.  Everyone wants to refinance their mortgage into a lower rate, but the lenders just don’t have enough employees to do all the work. Many mortgage jobs require a great deal of training. It doesn’t take very much training to sell loans, but it takes a lot of training to be a loan processor, underwriter, or closer, or to do the other technical jobs that happen behind the scenes. 

Training is expensive and takes a long time, and lenders don’t want to hire people who they may only need for a short time (while rates are low). So to discourage business, lenders keep rates from dropping too low. It sounds ridiculous that a business would try to discourage business, but that’s how the banking industry works. Yes, lenders want a lot of business, but they don’t want so much that they have to go out and hire and train new employees, who they will have to lay off when business inevitably slows down.  Think about this as if you own a restaurant. If everyone wants to eat the food your serve every single night, it will eventually get to the point where you have to raise your prices to discourage people from coming to your restaurant. Otherwise, your employees will be overworked, and they will quit. That is the kiss of death for all businesses – getting so busy, your employees quit.

Profit

The third reason mortgage rates won’t keep dropping is because there are a lot of people who have to get paid when a mortgage is sold.  The sales person, the lender, Fannie Mae, the investors who purchase the bonds, and the lender who services your loan (sends you the bill), not to mention all the people who work behind the scenes (loan processors, underwriters, closers, etc.), all need to get paid, and the money to pay them comes from the interest you pay on your mortgage.  Interest rates can only go so low before there’s just not enough profit to pay everyone.

Mortgage rates are low right now.  Expecting them to keep getting lower is probably not wise.  This is not to say that the rates today are absolutely the lowest possible rates.  However, they are the lowest in history, and that should tell you something about how low they will go.  Lenders are in business to make money, not to give you the lowest rate possible. Grab the cheap money while you can.  Waiting for something that probably won’t happen could be one of the worst financial decisions you make.

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