mortgage

Mortgage interest rates: hard to predict

It's a good idea to follow the direction of mortgage interest rates if you're house shopping, thinking about refinancing or considering a second mortgage or home equity line of credit, or HELOC.

In an ideal world, borrowers would have perfect knowledge of whether mortgage interest rates were headed up, down or sideways. With that information, they could make better decisions about whether to apply now, wait or lock in a current rate on a new loan.

Since that perfect world doesn't exist, borrowers must make their own best guess as to what's ahead, assessing their own tolerance for the risk of being wrong and making their own decision to move forward -- or not.

Data may help

Mortgage rate-watchers use a variety of sources to estimate the direction of mortgage interest rates. Statements from the Federal Reserve, charts of rate trends over time, brokers' price sheets, surveys of lenders' rates and rates on U.S. Treasuries, especially the 10-year term, may be useful signposts. Developments in the financial markets and changes in government monetary policy also affect mortgage interest rates.

Some rate-watchers manage a decent track record of solid predictions. Others are wrong more often than not, and still others run about 50-50 in their forecasts. A consensus might be more reliable than the opinion of one person. But even then, no one really knows for sure what future interest rates will be.

Locked and fixed

Borrowers have two ways to protect themselves from mortgage interest rate fluctuations: rate locks and fixed-rate mortgages.

Borrowers who lock -- rather than "float" -- an interest rate may sacrifice the possibility of a lower rate, but also avoid the risk of a higher rate that might make their new loan uncomfortable or unaffordable.

Borrowers who stick with a fixed-rate mortgage loan, rather than an adjustable-rate mortgage, or ARM, give up the potential of a lower rate and payment, but get the security of knowing their rate will never be higher than it is at the start of the loan term.

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