How economy-watchers get the best mortgage rates
By Michael D. Larson • Bankrate.com

Mortgage rates stink, right? Not if you're Vanessa Civalero.

The 26-year-old commercial banking client manager snagged a 6.5 percent 30-year fixed-rate loan in May 1999, paying just half a point up front. Don Vaughan, 42, has no complaints either. The freelance writer got a like-term mortgage for just 6.875 percent last March -- without paying points or closing costs.

They aren't alone. Plenty of people locked in before Federal Reserve Board Chairman Alan Greenspan started mucking things up for mortgage hunters. But rather than fill a bunch of water balloons and wait for the lucky $&*(!)#s to walk by, today's buyers may want to consider how their predecessors were able to lock in low.

Some succeeded by pure chance. But others put in the necessary effort to gauge which way interest rate winds were blowing around closing time. Following their example -- and the guidance of financial experts -- could help you pull the trigger at the right time, too.

"We had just gotten married and we knew we wanted to start looking for a house down the road, maybe a year out. But I kept my eyes on the rates and since they were really lower, we started looking right away," says Civalero, who has been living in her Boca Raton, Fla., house with her husband Pablo, also 26, for a little over a year.

"I just essentially ran the numbers, saw the mortgage rates and how low they were," adds Civalero. "It was just perfect timing, I guess."

Keeping an eye on the numbers
Perfect timing, yes. But Civalero also kept an eye on the market's machinations -- something that's more important than ever for mortgage borrowers. Economic news, stock market movements, breaking international developments and other events all translate into rate changes at local lender offices within hours -- or even minutes. Loan shoppers who keep their ears open and their eyes on the data have an advantage over their less-prepared brethren because they can often anticipate when the lowest rates will be available.

"Alan Greenspan may follow 200 indicators, but the average person can look at a handful and have a pretty good handle of what's happening," says Lynn Reaser, chief economist with Bank of America's Asset Management Group. "Especially today with the Internet, all of these data are readily available."

Case in point: Civalero locked in her loan just as April was giving way to May, partly because she knew an upcoming Consumer Price Index report had the potential to drive rates higher if it spooked the markets.

"My dad said, 'Lock in now because I don't know what the data's going to do,' " she recalls.

Just over two weeks later, the CPI turned in its largest monthly increase since October 1990. Thirty-year fixed rates, which averaged around 6.90 percent when Civalero locked in and started inching up ahead of the report, jumped to 7.24 percent after it hit the wire.

"You kind of get a good feel for a good time, and my feeling was anything at 7 percent or below was an awesome rate," she says.

Trend watchers reap rewards
Timing short-term rate moves like last May's is difficult. Borrowers may even miss the chance to get a lower rate by locking in ahead of a dreaded number that turns out to be benign. But savvy shoppers should always keep track of longer-term trends that develop over a few months. By learning how to react to them, they can save big bucks.

Take the recent Fed rate hikes. They're designed to push borrowing costs high enough to cool the economy down without plunging it into recession. Over the past year and a half, the fear of the hikes and the increases themselves have driven mortgage rates steadily higher.

But consumers who don't brush up on their economics may not realize that interest rates tend to move in cycles. After a prolonged increase, a slow drop usually occurs. Smart shoppers can take advantage of that fact by waiting to buy until the downslide begins. Some experts think the most recent cycle's slide may have just begun, given that the first hint of slowing economic growth appeared in reports on housing sales, construction activity, employment and manufacturing released in late May and early June.

"I have no doubt that the mortgage rate increases are designed to and are now hitting the housing sector. They will act as a disincentive not only for homes, but also for any large-ticket durable good," says David Littmann, chief economist with Comerica Inc. in Detroit. "Anything that has a credit sensitivity will be hit by the current rout."

Good times ahead
"If the consumer, the prospective home buyer, has an option and would like to wait a year, I think they will be rewarded," he adds. "If they wait a year and a half, they'll probably see lower rates yet."

Of course, not everyone can or should put their buying plans on hold. Some need to relocate for jobs. Others live where home values are appreciating rapidly enough that waiting will actually cost more. That's because the loan size needed to move into such an area could increase enough that the monthly payment would be higher even with lower interest rates.

Still, even consumers with no choice but to buy now can take heart. Though it may not seem like it today, good times in the housing market will likely be back again some day. When they return, their chance of doing as well with their next home as Vaughan did with his current one will rise exponentially.

"It wasn't any kind of preparing on our part, it was just sort of a lucky coincidence," says Vaughan, who relocated to Raleigh, N.C., with his wife Nanette, 44, long before anyone thought 8 percent rates would strike.

"We're very happy with it, our mortgage rate. We have more to show for less money," he adds. "We love our house. It's in a terrific neighborhood and I really don't think we could have done better."