This article, however, warned me that while the refinancing may be good, I'll need to take care of it fast. It is actually the bond market that determines the mortgage rate, not the Fed. Fixed mortgages are linked to the 10-year Treasury, which is actually rising right now. However, these rates are still below 6%, and Quicken Loans chief economist Robert Walters said, "We don't get many opportunities to take a 30-year fixed below 6%." Adjustable-rate mortgages are pegged to the 1-year Treasury, which is expected to continue to decrease, so refinancing would be a good idea here.
7 comments:
This is all sensible.
Not everyone understands that the the Fed doesn't control longer rates well.
But ... the Fed's action draws peoples' attention to refinancing.
Who knew? I always thought the Fed controlled all rates. It makes sense, though, that the bond market would really control the rates for mortgages since both are long-term instruments.
Extra Credit - Dr. Tufte
Dr. Tufte you said that the Fed does not control longer rates well. What effect do you think the potential March rate cut will have on long rates and refinancing?
Extra Credit--Dr. Tufte
Dr. Tufte, I think you made a good point that we don't understand completely how the Fed controls longer term rates. We hear all the news about the Fed dropping rates and assume it will have an affect on all interest rates. This isn't the case. Despite the recent rate cuts by the Fed, we are still seeing mortgage rates around 6% and commercial lending rates around 7% at best. Vehicle loans are in the high 6% range as well. These are all areas I would have assumed would be affected by the Fed cuts. I am learning however that the banks don't automatically pass those cuts on down to their customers. The area I really see affected by the cuts has been in interest rates on savings accounts. Interesting phenomenon! No hesitation to cut the rates on savings, but holding back on the lending rates. The banks are absorbing the difference.
Dr. Tufte said that the Fed's action draws people's attention to refinancing. It's really the media's attention on the Fed that creates so much hype about refinancing. It also shows that the media doesn't know what they are talking about most of the time because it is the bond market that determines interest rates, not the Fed's short term interest rates to the financial industry. There is also to little information for homeowners to really assess their personal benefits to refinancing. In many situations it is beneficial but the interest rate is only one piece of the puzzle and homeowners need to also consider other factors. These include the length of time they have been in their home and how long they plan on living in their home if the refinance. Too many people make the quick decision to refinance and end up losing equity or owing more than what they paid on the house.
Dr. Tufte
Yeah well, I just wish I had a house so I could think about the option of refinancing. However, when my wife and I was house shopping it was at the peak of the housing market boom and today we would be in a world of hurt if we had bought. If you are listening, the Fed can make you do a lot of things. I am cautious about trends and quick opportunities.
Gavin: I would say that the ability of the Fed to control a rate in inversely proportional to its length, and declines in roportion to the loans dependence on individual personality factors.
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