The Daily Mortgage Interest Rate Lock Advisory - June 25, 2008

That's hard to say. None of us can predict where interest rates will be tomorrow, next week, or next month let alone what will happen in the next year or two.

Here's what today's comments from the Feds basically mean: Concerns about growth have diminished. Consumer confidence is the lowest since 1979, and the overall economy doesn't look like it will improve any time soon. That's good news for bonds and mortgage rates. The Feds expect inflation to moderate. However, considering other factors, uncertainty about inflation outlook remains high. Inflation is bad news for bonds and mortgage interest rates.

If inflation (and fears of inflation) can be held in check, we might start to see improvements in mortgage interest rates soon. But we're not out of the woods yet. While core inflation remains relatively low, higher inflation is still a very real possibility with the continuing high oil and food prices. I expect the Feds will start raising short term interest rates before the end of the year to help keep inflation in check.

Also, keep an eye on Israel and Iran. I expect we'll see action there before the end of the year while we still have a Republican president sympathetic to the Israeli's cause. That's a powder keg waiting to explode, and if it does - well let me just say that if you think gas prices are high now.... And guess what that will do to inflation (and mortgage rates).

The rates can go only so much higher before people "balk" at buying homes (or buy less home than what they really want). We're already experiencing a slowdown in mortgage applications, so I expect we'll hit an upper limit relatively soon if mortgage rates continue upwards. Will people still buy and sell homes? Sure. Job transfers, better opportunities, and many other factors cause people to move. Also, don't forget homes in many areas are still declining in values, and the foreclosure rate continues to escalate. And, there are many ARMs still waiting for an upwards adjustment in the next 2 - 4 years.

While on the subject of foreclosure, that brings me to another point. I used to think that the Feds were deliberately letting the dollar devalue against world currencies to finally bring the trade imbalance in check. Now I think there's another reason. Many ARMs are tied to the LIBOR - that's the London Interbank Offering Rate for world currencies. The LIBOR is essentially tied to the value of the US dollar. If the value of the US dollar goes up, then the LIBOR index goes up, and so do the adjustments in the LIBOR ARMs (read: higher monthly mortgage payments for people in the ARMs with a LIBOR index). However, if the value of the dollar drops, then the index drops, and the adjustments in the ARMs won't be as severe. This is all to help diminish the rate of foreclosures here in the US. The downside is everything costs more, especially foreign goods and oil, adding to the fear of inflation. And if the prices of foreign goods rise, so will domestic goods. The Feds won't admit this, and I may be off base. But IMHO....

Without knowing all of the details of your current situation that I would need to determine whether or not you should wait, I'm going to stretch a bit and say "wait" and continue watching the markets. You still have a couple of years before your rate adjusts. Just bear in mind that interest rates are based on numerous economic, financial and credit based factors that adjust daily. And when rates do come back down to a level you feel comfortable with, "bite the bullet" and refinance. Just remember, it always seems more painful to have not refinanced when you should have and watch rates go up as opposed to waiting and then watching rates get a little better. 

I'm here at your service, Tara! And thanks for the kind words. I appreciate it.