by Carl Kiger, President of Oak Wealth Mortgage Group

Many of you have contacted me recently about refinancing. Given this fact, I thought it would be helpful to explain why you should be prepared to move quickly when making a decision about refinancing.

First, let’s look at what causes the 30-year fixed mortgage rates to fluctuate. The 30-year fixed mortgage rate most closely tracks to the 10-year Treasury bond yield. As the yield moves up, 30-year fixed rates tend to move up; as the yield moves down, 30-year fixed rates tend to move down. You can easily get a feel for what mortgage rates are doing on a given day by going to websites such as this to see what the 10-year Treasury bond yields are doing on that day.

Given the relationship described above, we now need to understand what causes movement in the 10-year Treasury yield. Whenever the economic outlook for our country is unfavorable, many investors place their money in safer investments such as the 10-year Treasury bond. This investing drives the prices of the bond up and the yield of the bond down. Therefore, when the economic outlook is unfavorable, mortgage rates tend to fall because of this relationship. Similarly, when the outlook for our country’s economy is favorable, investors look for more aggressive investments, typically not 10-year Treasury bonds. With this type of investing, the price of the bond starts to fall and the yield on the bond starts to rise. Therefore, when the outlook for the economy is more favorable, 30-year fixed mortgage rates tend to rise.

Now that we have a basic understanding of how it all works, let’s look at a recent real-world example. In late January of 2008, the news regarding the economy started to look unfavorable. The amount of housing foreclosures, the problems in the mortgage industry, and the rocketing oil prices, all served to create a negative economic outlook. Mortgage rates started to fall. In fact, the 30-year fixed rate fell all the way to 5.25%. The federal government reacted quickly and made two reductions in the “federal funds” rate, also announcing that tax rebates would be sent to all taxpayers. These actions immediately caused the economic outlook to brighten somewhat, causing 30-year fixed rates to rise. Over a four week period, the 30-year fixed rate rose all the way back up to 6.25%; however, our economy had some serious issues at this time. After the exuberance of these announcements wore off, the bad news concerning the economy continued to roll in, causing the long-term outlook for our economy to look poor. In fact, many economists believe we are now in a recession; therefore, the 30-year fixed rate has trended back down to the 5.625% range.

The important thing to remember is that rates will always ebb and flow with the economic outlook and the fluctuation of 10-year Treasury bond yields. When the overall US economy is weak, the 30-year fixed rate will tend to be lower. The government will try to do things to stimulate and strengthen the economy. These actions will cause temporary spikes in the rate, but overall the rate will tend to remain low. Similarly, when the economy is strong, the 30-year fixed rates will tend to be higher. When this is the case, the government will try to take actions to keep the economy in check. There will be temporary drops in the rate, but overall the rate will tend to remain high.

Finally, it is important to understand what you are hearing in the news media about rates. When you hear that the federal government has cut the “fed funds” rate, it is important to understand that this is a short-term rate meant to stimulate the economy. This specific action tends to make mortgage rates go up.

When the news media talks about mortgage rates, please keep in mind that their data is usually one to two weeks behind. If they report that rates are dropping, that means that rates dropped a week or so ago. Since that time, rates could have possibly stayed low or trended back upward.

Because of the state of our economy, mortgage rates are very volatile right now. During normal economic times, rates typically move only once per day. However, right now they can move four or five times per day. Given this, if you are looking to refinance, you should be prepared to move quickly when making a decision. If we hit a rate that you are interested in, you should lock it and move forward; otherwise, you may miss it all together.

To see Carl Kiger’s newsletter, OakWealth Viewpoint, click here.

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