Rates keep rising over the next couple years?

Question

I am purchasing a home currently locked at 5.75% (30 year fixed). My mortgage broker is highly recommending I do not pay any points to get a better rate. I have another rate offer at 4.75% with points that would break even in 1.5 years versus the 5.75% rate. However, the 5.75% broker is "almost certain" rates will be dropping within the next couple years, so I will be refinancing to a better rate and does not want me paying down the rate now as it's a waste of money. His main thought around that is a looming recession. This advice on rates is completely opposite of what I am seeing everywhere else. Of course, there are no guarantees, but would love some thoughts on what rates will be doing over the next few years.

Kevin Luttrell · Answer

@Laura Johnson The economic experts I follow and respect the most are of the same opinion as your mortgage broker regarding interest rates. With inflation where it is and the Fed's attempt to fight it, a recession in the near future (next year or so) is likely. If we go into a recession, rates are likely to fall.

That being said, 1.5 years is a very short recoup period. I would probably take the 4.75% option in your case. If the recoup period was any longer (2+ years) I'd likely go with the higher rate. But that's just me.

Mike Dymski · Answer

1.5 year payback does not sound right for a 1% rate discount.  If it's accurate, take that all day long.

Russell Brazil · Answer

From 1940 to 1980 we were in a rising interest rate environment. From 1981 to 2021 we were in a falling interest rate environment.

If the last 2 rate environments lasted 40 years each, then I dont think it is likely we will see a large turn around in rates in a short period of time.

Chris Mason · Answer

I'm sure your mortgage broker could offer you an option with points. I pitch no points for the same reasons, then present 4 rate options, 3 of which have points. Just FYI/context.

Rates will come back down. Part of the 40 year pattern.

Or, if rates do not come back down, our debt-addicted society will devolve into Mad Max and the Thunderdome, and your rate will automatically drop to 0%, since if someone comes to foreclose on you for non-payment, you can simply shoot them.

@Russell Brazil In the early 1970s, the US Dollar was taken off of the gold standard. A decade of financial chaos followed, leading to the interest rate turnaround in the early 1980s, in part because we had a first term movie star president that really wanted to get re-elected, him being the first person to fully grasp what it meant to be off the gold standard. Sure enough, he got re-elected. We recently had a reality TV star in the white house who attempted to use that same mechanism to achieve that same result. The undoing of the temporary measures that brought rates into the mid 2s is why we're in the mid 5s. I don't think that's the same sort of massive permanent shift that removing the US Dollar from the gold standard was.

In before: "OMG how could you say that, the Fed is totally independent and apolitical!"

Alan Lacey · Answer

Well first thing ask both lenders for their quotes at those rates so you can make a apples to apples comparison. Rates are probably likely to go down, but what does it matter if you have already broken even. If financing the points make sure to not just compare interest savings to discount fee, but just the payment difference vs the discount fee.

Frank Greg · Answer

@Laura Johnson

Its really depends on the actual loan amount or principal:

Loan Amount

Rate

Term (Months)

Monthly Payment

$500,000

5.75%

360

$2,918

$500,000

4.75%

360

$2,608

Difference

Per Month:

$310

Per Year:

$3,716

David Kelly · Answer

@Laura Johnson

Be careful. If someone offered you 4.75% with a small charge I would contact them again today to see if that is a lockable rate and cost. Most likely they quoted it on a good day and probably cannot honor it today.

It seems like every deal I have now I go up against another lender they “shopped” and someone offers something else that sounds better but in the end it is not￼.  Look at all the numbers involved. Ask for a loan estimate. If you would like a second opinion on the numbers I would be happy to keep them honest for you.

Scott E. · Answer

IF your broker is correct and you take the 5.75% interest rate now, only to refinance again when "rates go down" in 1.5 years, you need to think about:

1) How much extra interest are you going to pay at the 5.75% rate for the next 1.5 years while you wait for rates to go down?

2) What will your TOTAL closing costs be if you close now at 5.75% and then refinance again in 1.5 years when "rates go down"

Something tells me you'd be better off paying the points now to just lock in a low rate and forget about it.

Theresa Harris · Answer

Rates are likely to go up a bit. Not sure why they'd tell you to do the higher rate and then refinance in a few years when the rates are lower as that is going to cost you even more than going with the lower rate right off the bat.

Nick Belsky · Answer

@Laura Johnson

This a simple break even math and assessing how much risk you are willing to take on.  If you don't think rates will come down for, say, 5 years, and your break even to buy down is in 1-1.5, you aren't losing anything... Pre-Payment penalties are more important than ever right now as none of us have a crystal ball and can tell what is going to happen in 6 months or 6 years.

Cheers!

Rates keep rising over the next couple years?

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