Every December there's a market phenomenon that sends interest rates higher by about 0.25% across the board, and it can make buying a home at this time less than joyous when buyers realize they're going to be paying more for their loan than they would have earlier in the year. I call it the "Santa Bubble" and here's how it works.
Beginning each year around Dec. 5 and lasting through mid-January, mortgage rates typically increase due to heavy bond market activity. At the same time, consumer confidence is up, retail sales are strong and financial professionals are re-balancing their client portfolios, moving money around and completing trades at a fast-and-furious pace in the last weeks of the calendar year.
Other scenarios that may influence the annual Santa Bubble include the following:
- Companies and individuals that had a capital loss may be influenced to make a year-end money move to reduce their exposure to tax liability. Such events can further cause monies to flow out of the bond market, Rising bond market yields generate and support low mortgage rates In order to drive such activity, the money usually comes at the cost of selling stock, meaning people are moving monies out of individual equities and into the bond market. This is precisely why mortgage lenders closely watch the fixed-income market likes hawks, in particular, the daily trading of Fannie Mae mortgage bonds. Any trend directions signal mortgage pricing changes, which in turn affect the rates borrowers pay on home loans.
- Bond traders are paid to move money in order to best optimize returns for their clients. Make no mistake: bond traders are paid based on the movement of money, whether it results in a gain or loss, either way they are still compensated.
What It Means for Homebuyers
With all of this in mind, does it really make sense to lock in a mortgage rate during the holiday season? It really depends on your deadline for wrapping up your transaction. If you're buying a home, you may be under contract and be pressed to perform on a contract which means accepting a market rate. Granted, you could always refinance the loan in the future, but in situations where push comes to shove, you may just have to make a decision. A skilled and experienced mortgage professional should be able to show you rate and pricing scenarios so you can best determine what makes the most financial sense for you during your loan application process.
What It Means for Refinancers
Borrowers who are refinancing have a little bit of a different sense of urgency. If a refinance can lower your interest rate or shorten your term and allow you to save money while continuing to chip away at the loan, even if it's in the holiday season, it still could prove to pencil. Alternatively, you can always apply with a mortgage company and float your interest rate. This can be an ideal situation if you're waiting for a certain interest rate and/or payment to be within your grasp in relationship to what you're trying to accomplish.
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