Fed Cut May Lower Mortgages

Get ready to refinance your mortgage--perhaps even if you already have recently.

The Federal Reserve’s move Monday to cut short-term interest rates again and pour billions of dollars in cash into the nation’s financial system may push mortgage interest rates to their lowest levels in 30 years.

“It may take a week for the trend to take hold,” said Greg McBride, senior analyst at BankRate.com, a rate research and analysis firm in West Palm Beach, Fla. “But what consumers can expect to see from mortgage rates over the next several weeks is further decline.”

Mortgage rates already had been sliding in recent weeks. Mortgage giant Freddie Mac’s benchmark 30-year home loan rate fell to 6.86% as of late last week, the lowest since early 1999.

Now, thanks to weak economic reports and the Federal Reserve’s stated resolve to pump liquidity into the nation’s financial system, mortgage rates could ease further, some analysts say.

“All of the pieces are there,” said Earl Peattie, president of Mortgage News Co. in Morro Bay, Calif. “I think we have a possibility of heading into the lowest rates we have ever seen.”

Mortgage companies think consumers will rush to refinance in coming weeks, extending a refinancing trend that started early this year when the Fed started slashing rates.

Because rates have dropped so much in such a short period, some consumers who refinanced recently may benefit from refinancing again, especially if they plan to stay in their homes for a long time or can save enough to pay off their refinancing fees with their monthly cost savings.

“We are gearing up for record volumes because rates are low today and we think they are going to stay low for the foreseeable future,” said Brad Blackwell, national sales manager for Wells Fargo Home Mortgage in Pleasanton, Calif.

Though the Fed’s cuts in short-term rates help, mortgage rates mostly take their cue from long-term bond yields, which are set by the marketplace. The yield on the 10-year U.S. Treasury note, a benchmark for mortgage rates, has fallen in recent weeks to its lowest since early 1999. Lower bond yields reflect investors’ expectations of a weaker economy.

Today’s mortgage rates, down a full percentage point from year-ago levels, are just slightly shy of the low ebbs the mortgage market hit in 1998, Gumbinger said. And those levels were just a fraction off the all-time lows hit during the 1960s and ‘70s.

“I would expect to see slightly lower rates [Tuesday] and Wednesday, and we don’t have much lower to go until we hit 31-, 32- or even 33-year lows,” Gumbinger said.

For indebted consumers, that’s welcome news. Each one percentage point drop in mortgage rates can save a homeowner with a $100,000 30-year loan about $70 a month.

A wave of refinancings could save consumers millions of dollars that could be used to pay off other debts or to buy goods and services, said Paul Kasriel, chief economist with Northern Trust in Chicago.

So far, it appears consumers are paying other debts with the money, he added. That could put American consumers in a somewhat stronger financial position over the long haul, although it won’t have much short-term benefit for the U.S. economy.

Those who do opt to refinance should consider locking in a rate immediately--even if that means missing the possibility of slightly lower rates in the future, said Doug Perry, first vice president of consumer markets at Countrywide Home Loans in Calabasas. That’s mainly because financial markets will be extremely volatile in the wake of last week’s terrorist attacks and the likelihood of a U.S. military response.

“Refinancing now presents a wonderful opportunity,” said Lynn Reaser, chief economist and senior market strategist with Banc of America Capital Management in St. Louis. “It’s possible that rates will go down somewhat further, but these are very attractive rates.”

Some other rates also may fall, thanks to the Fed’s action Monday. Rates on home equity lines of credit, which are tied to changes in the prime rate, will fall. Many consumers with variable-rate credit cards also will get a break when interest rates on their credit cards are adjusted.

But for every consumer who wins when interest rates drop, there’s a loser, Kasriel said.

People who invest in fixed-income instruments, such as money market accounts, bonds and certificates of deposit, may see their income from these investments decline.

“On the other side of this, some senior citizen is getting a lower return on his or her savings,” Kasriel said.