Lower Mortgage Rates: A Gamble or Worth the Wait?

Whether or not to lock in mortgage rates is always a tricky decision, but these days, it should be somewhat easier for consumers. We now have historically low mortgage rates that have never been seen before, and they're a really good bet, even if rates continue to fall farther.

The dilemma for borrowers is always the same, regardless of what rates are doing. Should they lock in current rates, let them float for a week or two, or opt to take out an adjustable-rate mortgage (ARM), instead of sticking to predictable fixed mortgage rates?

Finding appropriate mortgage rates

Every financial counselor and market guru has an opinion regarding the direction of rates, and whether or not it's worth it to wait. But the bottom line is that it generally depends upon a borrower's own particular financial circumstances. If a couple is buying a home, but plans to move within two to three years, for example, it really doesn't matter where mortgage interest rates are headed over the next decade. They should probably try to get the most affordable down payment and monthly payment possible, and avoid any exotic loans that could be adjusted higher within the next couple of years.

Low mortgage rates not for all sizes

Similarly, low mortgage rates aren't going to help someone refinance out of their problems if they're also saddled with second mortgages and credit card debt. Many people are attracted to the new FHA loan programs that are meant to assist homeowners facing foreclosure, for instance, but they may not be eligible for them until the second mortgage holders agree to take a loss. Then there's the more positive situation of a homeowner with an ARM loan that's going to reset, but will be recalculated to a lower rate and payment-not a dreaded higher one-because interest rates have fallen since they took out the loan.

How low can mortgage rates go?

Based on what other interest-bearing instruments are doing, many pundits point out that mortgage rates should drop more, even though they're already near rock bottom. That's because the gap between 30-year fixed mortgage rates and the 10-year Treasury bond is around three percentage points. The 10-year Treasury bond is traditionally the benchmark interest rate for pricing mortgages, and the gap historically runs about 1.5 percentage points. To hit that level, mortgage rates would need to drop about another full point from where they are today, which is evidence that those who are patiently waiting are wise. Home prices are still falling, too, which means that even if mortgage rates don't decline, buyers might get a better deal by buying later in the year.

Borrowers should go with mortgages they can comfortably afford. Losing sleep over the direction of rates is usually a symptom that you're borrowing more than you can handle. But mortgage rates are at a 50-year low, which makes it easier to come out ahead, whatever you decide to do.