12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Don't Wait for the Feds to Act before Refinancing Your Mortgage
By Richard BarringtonNFNS Columnist
In mid-January,
comments from Federal Reserve Chairman Ben Bernanke touched off widespread
speculation that the Fed would lower interest rates at the end of the month. This
type of news gets the attention of mortgage holders, who might sense a chance
to refinance if the Fed lowers rates. However, mortgage holders may want to
look into refinancing even before the Fed acts.
There are several different types of interest rates, and the
ones the Federal Reserve controls are very short-term interest rates for large
institutions. In contrast, mortgage rates are long-term interest rates for
private individuals. In other words, what the Fed does can have an impact on
the mortgage market, but does not directly control it. In fact, since the Fed
usually makes interest rate changes at regularly scheduled meetings while mortgage
rates are free to float in the marketplace day by day, mortgage rates generally
can react to market conditions faster than the Fed.
The Change in Mortgage
Rates
Interest rates tend to run in cycles, with rising and falling phases of those cycles. This is true for both the institutional discount rate controlled by the Fed, and for mortgage rates. However, if you look at turning points over the last cycle, it is clear that mortgage rates tend to react before the Federal Reserve:
- At the low point of the interest rate cycle, 30-year mortgage rates bottomed out at 5.21% in June of 2003, and began rising from there, while the Federal Reserve didn't start raising its rate until a year later, in June of 2004
- At the
high point of the cycle, 30-year mortgage rates peaked at 6.79% in July of
2006, and began falling after that, while the Federal Reserve didn't start
lowering rates until August of 2007
This pattern has continued in 2008: while the Federal
Reserve was discussing lowering rates at the end of January, mortgage rates
were already moving downward as the new year began.
For mortgage holders, the most important outcome of all this
is that mortgage rates have declined substantially, with 30-year mortgage rates
reaching 5.87% by early January. For many homeowners, this represents a
significant enough drop to make refinancing worthwhile.
Watch What the Feds
are Watching
The cyclical pattern of interest rates is important, because
now that mortgage rates have fallen, there is no telling how long they'll stay
down. The Federal Reserve and the mortgage markets pay attention to many of the
same economic indicators, but again, mortgage rates have the opportunity to
move more quickly. That's why it is better to watch what the Fed is watching
rather than just watching the Fed. For example, one thing that could spoil the
party is inflation, since 2007 just entered the books as the worst year for
inflation in seventeen years. Inflation has a tendency to drive interest rates
up, so if current rates represent a refinancing opportunity for you, it may be
wise to act quickly.
Sources:
U.S.
Federal Reserve
Associated
Press
About the Author:
Richard Barrington is
a freelance writer and novelist who previously spent over twenty years as an
investment industry executive.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.