It’s a graph of the 5-year government bond yield—the guiding force behind long-term fixed mortgage rates.
On Wednesday, the 5-year bond ended the day at 1.89%—the highest close in over two years. If you were a trend follower, you wouldn’t bet against rates moving higher from here. But many people are.
The folks I’m talking about are fixed-rate mortgage shoppers with renewals or purchases closing in 5-9 weeks.
These people have a choice. They can: (a) Lock into a 45- to 120-day rate hold now, or (b) Wait until they’re within 30 days of closing. That’s when many lenders feature “quick close” specials, typically their best pricing.
(There are exceptions. A few lenders offer quick closes with up to 60-day holds, but those rates are currently higher than today’s best 30-day rates. Occasionally you'll find the best deals with 90- to 120-day holds, but they're usually at regional lenders with smaller lending areas.)
Quick close rates are generally lower because lenders’ hedging costs aren’t as high. In fact, 30-day rates can be 10-20+ basis points better than long-term rate holds. But waiting for a better deal is a dice roll because rates can climb in the meantime. In fact, it happens about half the time based on simple probability.
So is it really worth the gamble—risking an unknown rate jump to save one or two-tenths of a percent?
Folks should assume that the odds of rates increasing are at least 50%. If the chance of a rate drop is the same, one can expect no mathematical edge by waiting for better rates. Instead, someone can secure a rate today, eliminate all upside risk and benefit from a rate drop if rates fall before closing.
Timing the market is seldom astute, and with uptrending rates that’s arguably even truer.
Sidebar: Over the last 10 years, the 5-year government bond yield has averaged 2.94%, more than 100 basis points higher than today. Rob McLister, CMT