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What Ben Bernanke Means to Your Mortgage

By Richard Barrington
NFNS Columnist


On Tuesday, September 18, amid much fanfare, Federal Reserve Chairman Ben Bernanke lowered short-term interest rates by half a percentage point. Commentators gushed that this would spur the economy, by lowering borrowing costs on everything from credit cards to mortgages.

Certainly, if you have been looking to take out a new home loan or refinance an existing mortgage, conditions have been improving lately. But a closer look suggests that you didn't need to wait for the Federal Reserve to find lower mortgage rates.

Wombats and Camels

It's important to remember that the Federal Reserve controls very short-term interest rates. Mortgage rates, on the other hand, are a form of long-term interest rate. Short-term interest rates and long-term rates are similar in the same sense that wombats and camels are similar because they are both four-legged mammals. Both may react to some of the same things, but they are very different animals.

If you are waiting to refinance or take out a new home loan, you'd be better off to follow the long-term bond market, which has more in common with mortgage rates than does the Federal Reserve rate. Movements in fifteen and thirty year bonds can be very different from movements in Federal Reserve Rates.

Don't Look Now, But Mortgage Rates Were Already Trending Lower...

Bond market rates--and mortgage rates--had been trending down well before the Federal Reserve acted. Tellingly, bond yields ticked slightly upward--not downward--on news of the Federal Reserve rate cut. This was more or less the bond market's version of a shrug.

Indeed, the actions of the Federal Reserve often tend to follow, rather than lead, the bond market. Either way, lower mortgage rates signal an opportunity to refinance for some people, or get a more attractive new home loan for others--and the bond market has been signaling this for several weeks now.

Sources:
Bloomberg.com
Yahoo! Finance

About the Author:
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.



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