FROM THESTREET.COM: With all the headlines in recent times about Federal Reserve rate cuts, it’s easy to jump to the wrong conclusion: that you can afford to wait to refinance your home.
But that’s a dangerous position to take. It’s one thing to speculate with interest rate futures. It’s quite another to gamble with the roof over your head.
Mortgage rates overall have been slightly higher across the board, from fixed-rate 30-year loans to adjustable-rate mortgages. The bond market, and the mortgage market, may be looking across the temporary decline in rates to the inflation that is likely to follow this current round of Fed easing.
Dangers of Playing the Refi Game
There are two important reasons not to “game” the mortgage rate if you know you need to refinance, or are one of the very few still buying a new home. (If you are looking for a fixed-rate mortgage, you can use the BankingMyWay Fixed Mortgage Loan Calculator to calculate the loan payment.)First: The Fed does not “control” long term rates! The Fed can pump liquidity into the system, and can set short-term rates. But it can’t control the longer-term bond market, where trillions of dollars of debt are freely traded each day. In that bond market, the very sophisticated participants are considering the impact of all that liquidity -- and its potential to create inflation down the road.
Typically, the 30-year fixed-rate mortgage tracks the yield of the 10-year Treasury note (because very few mortgages are actually held for 30 years). It is not the same rate as 10-year Treasuries, of course, because individual mortgages have a higher degree of risk—as we’ve all seen lately.
Inflation Fears Push Rates Up, Bond Prices Down
If bond buyers are worried about inflation, they’re going to demand higher rates to compensate. In reality, if they sniff inflation coming, they start to sell the bonds they own, pushing prices down and yields up.