A Mortgage Rate Prediction For The Next 7 Days (September 23, 2010)

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Wondering if now’s the right time to refinance? This week’s Bankrate.com Mortgage Rate Trend Index may give you guidance.

Conforming Mortgage Rates Only

The fine print: These mortgage rate predictions are based on Fannie Mae- and Freddie Mac-issued mortgage-backed securities. MBS pricing determines rates in Blue Ash section of Cincinnati, Ohio; Loudoun County, VA; and everywhere else you can get a conforming, conventional mortgage.

The survey does not cover FHA streamline refinances because FHA mortgage rates are based on GNMA securities. Furthermore, “special” loans like non-warrantable condos, condotels, and loans for investors with more than 4 mortgages are excluded.

for a real-time rate quote.

Breaking Down The Predictions

Here’s the mortgage rate outlook for the upcoming week:

• 6% think mortgage rates will increase
• 23% think mortgage rates will decrease
• 71% think mortgage rates will won’t change

I expect mortgage rates to decrease.

My advice not be appropriate for your individual situation and I’m not always right. Ultimately, you may find your time better spent meeting Marcel the Shell with shoes on.

Either way, here’s what I told Bankrate.com:

“The FOMC statement pumped hope into mortgage markets.”

Just when you thought the Refi Boom was over, the Federal Reserve steps in to give it new life.

The Federal Reserve’s Power Of Influence

The Federal Reserve doesn’t control mortgage rates, but it does exert a big influence. This is because the Federal Reserve is the nation’s central banker and staffed with the people who job is to speed up or slow down the economy as they see fit.

In the end, it’s irrelevant whether the Fed’s bankers are the smartest or most foolish people in the world — they’re still the ones who make monetary policy, Ergo, what the Fed says matters.  Ironically, sometimes more than its actual policies.

This week, the Fed hinted at a doozy.

Tucked neatly with the FOMC statement this Tuesday was the suggestion that inflation is “somewhat below” optimal levels. It’s a downgrade from the last statement in which the Fed said inflation was “subdued”.

The change of phrase is raising concerns for deflation.

How Deflation Changes Mortgage Rates

Deflation is when the dollar gets more valuable over time; when purchasing power increases. In everyday life, this is experienced in falling prices.

Deflation is the opposite of inflation and, because inflation is bad for mortgage rates, deflation can be good for it.

Deflation’s influence on mortgage rates works like this:

• Mortgage-backed securities are priced in U.S. dollars
• Because the dollar is expected to be more valuable, investors flock to MBS and its coupon payments over time
• Extra demand for bonds pushes prices up, and mortgage rates down

Deflation has a dangerous side, though. Because prices are falling, consumers will tend to delay purchases of big-ticket items and other consumer goods. This slows consumer spending which, in turn, slows down the economy, ultimately, leading to more falling prices.

By most accounts, deflation is a bigger economic threat than inflation and the Fed just opened the door to the discussion.

Deflation Aside, It’s Still Prudent To Lock Your Rate

For now, deflation talk is just beginning and that may be the best time to make a move. Markets are famous for over-reacting on speculation and the coming dip in rates this week may be your chance to take advantage.

You may not want to lock today, but keep your finger on the rate lock trigger for sure.

Furthermore, when you shop for your rates, make sure you ask your loan officer about “zero-closing cost rates” because that will help you keep your options open for the future.  If  you don’t have a loan officer, call or and I’ll walk you through what to do. I’ll also get you pricing and explain how zero-cost mortgages really work.

Either way, rates are stupid low right now. Don’t miss a chance to do something about it. .

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.