Timing the Home Mortgage Refinance

Is it possible to time the refinancing of home to get better rate? There are many of us that are trying to refinance our homes and we always find that banks have the upper hand in this process. That is mainly because the mortgage bankers are professionals, but we consumers are not usually very well prepared with our home work. It pays to be a PreparedInvestor.

One of the main question during home refinancing is to answer if we can time the refinancing in such a way to get a better rate? That is the question I want to address in this post. Of course, there are many other things that you need to be familiar with and one good website to understand these is: http://www.mtgprofessor.com. This timing concept can be applicable for a new home financing as well, except that the new purchases have escrow to deal with.

The first dot the consumers need to connect is how the mortgage rates dance in tune with the treasury yield rates. Take a peek at the chart 1 below. Chart 1 compares 30 year conforming Fixed Rate Mortgage (FRM) with 10 year Treasury Constant Maturity from Jauary 1999 to present date.

Chart 1: 30 year Fixed Rate Mortgage vs. 10 year CMT


Observation 1: Clearly the 30 year FRM hugs the variation in 10 year treasury yield. The rates are not the same, but the variation in both seems to coincide. Please make that distinction. How would that help in timing the house refinancing? Keep a constant watch on the treasury yields and if the yield is declining mode, you might be better of delaying your refinancing until the yield chart bottoms out. This is assuming that your personal financial situation will allow you to delay the refinancing. If the yields have been going up, then you can either refinance immediately with the best rate you can get OR wait a little longer time until rates start coming down again. Working with rates sloping upwards is not a easy!

My thinking is that if you follow the treasury rates closely and if you are financially flexible, then you should be able to find a dip in the yield, however temporary it is. Even if you manage to get a quarter percentage less, that is equivalent to a few points down on your mortgage. And then count all the money saved for the next so many years in mortgage interest. On the same note, deciding on which day to lock in your interest rate is also an important choice that we have to make. Much to my dismay, not all of us connect these dots together when it comes to the decision time. And unknowingly we might be paying little more in mortgage every month.

The Chart 2 below is comparing 5/1 Hybrid ARM mortgage with 5 year Constant Maturity Treasury rates from January 2005 till present day. Observation 1 holds good in this chart as well.

Chart 2: 5/1 Hybrid ARM rates vs. 5 year CMT

Observation 2: From both the charts you can notice that until 2006 the mortgage rates were quick enough to follow the treasury yield changes. However starting 2007, since when we started having credit problems, the mortgage rates are little slow in following treasury yield dip and little eager in moving up than the yield rates. It seems like the mortgage lenders are eager to move the rates higher ever since the credit problem started (or rather recognized) in 2007. This behavior will probably last until the credit problem is effectively solved.

Timing the refinance can be a double edge sword. While you are waiting for the rates to go down, it can go upwards and there by sending all your planning down the drain. One of the recommendations that I have heard is to pick a rate that you can live with, and set that as your target. If the rate drops to that level, lock in the deal. You can always refinance the loan if rates head significantly lower, but you'll be protected if they should spike.

Like stock market, timing the refinance is tricky. But being aware of some factors can give you some edge at times.

-Nidhi

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