The fluctuation in mortgage interest rates has implications for when it the best time to buy and the best time to refinance a home mortgage. It is a popular misconception that low interest rates make for a good buying opportunity. It is not. Buy when interest rates are high, and refinance when interest rates are low.

When interest rates are declining, borrowers can finance larger sums, and this does prompt many people to buy and home prices to rise, but when interest rates are low is also when prices are highest. A buyer in low-interest-rate environment may obtain an expensive property, but the resale value of that property will decline when interest rates rise because future buyers will not be able to finance such large sums. A low-interest-rate environment is an excellent time to refinance because a conservative borrower can either obtain a lower payment or shorten the amortization schedule and pay the loan off faster.

The best time to purchase a house is when interest rates are very high. Again, this is counterintuitive because the interest is so much greater, but this will also mean the amount financed will be much lower and house prices will be relatively low. It is better to buy when interest rates are high and later refinance when interest rates decline. A borrower can refinance into a lower payment, but without additional cash, a borrower cannot refinance into a lower debt.

Interest rates have been on a steady decline since the early 1980s. In early 2009, mortgage interest rates hit record lows as the Federal Reserve lowered its target rates to near zero. It is nearly impossible for interest rates to go much lower unless the Federal Reserve starts paying lenders to borrow. People who buy in 2009 will almost certainly face higher future interest rates when they become sellers years in down the road.

Those that buy with fixed-rate financing will see a decline in the value of their homes, but at least their payments will be stable. Those that buy with adjustable rate mortgages will see both increasing payments and declining real estate values. They will probably default.

The Federal Reserve is doing everything in its power to lessen the impact of the housing bubble, but what they will accomplish is to spread the pain over a much longer period of time. It would be more painful in the short term if they did not attempt to manipulate the market, but in the long-term, they will do more damage than good.

Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
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