Jim, I Am Considering Refinancing. Every Time There Is A Rate Cut, It Does Not Seem To Translate To Mortgage Rates. How Will Today's Cut Affect Mortgage Rates?
This is a great question and one that puzzles me personally. Short term rates, like the Fed Funds Rate, are not the same as long term rates, such as 30 year mortgages. These are two different animals. Unfortunately, the uninformed media reports that mortgage rates will fall in direct proportion with short term interest rates, this is just not true. The only exception to this would be those that have an adjustable rate mortgage that is tied to a short term index, such as the prime rate.
It is true that a short term rate cut will lower some credit card rates and auto loans, but what about longer term instruments such as mortgages? Well, that is a bit more complex. According to Bank Rate Monitor, 30 year fixed rate mortgages are averaging 5.42% today. Yes, this is a good rate, but the rate did not drop 3/4 of a point in correlation with the Fed rate cut. In fact, currently in England lenders are raising mortgage rates despite cuts in the LIBOR (similar to our prime rate). The current three month trend in the United States is a reduction from about 6% to the current 5.42% for fixed rate mortgages. A further review of statistics over the last one year, show that 30 mortgages rates have only come down about 1/2 point! That’s right, in January of 2007 we were almost exactly where we are right now on the thirty year mortgage. So, all of the rate cuts during this last 12 months have done virtually nothing to mortgage rates, imagine that! What’s more, is that obtaining the advertised rate on a 30 year mortgage, requires better credit and a higher down payment than ever before. Due to heightened lending standards, most people will pay more for a mortgage today than they did a year ago. You won’t hear that on your cable news channel.
What does all of this mean? It is true that now may be a good time to refinance, but that has probably been the case for a year for many Americans. The news media is completely uninformed, and the idea that today’s Fed Funds Rate cut should have you running down to your mortgage lender to refinance is nonsense. I have written previously (and you can search this blog to find that article) on the steps to go through to decide if it is time to refinance or not. Expecting your cable news channel anchor to guide you on that decision is a big mistake.
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Helping you make the most of God’s money!