Watch Mortgage Interest Rates To Gauge Refinance

Added September 25, 2008 by Ilyce R. Glink

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Summary: Monitoring mortgage interest rates as opposed to all the economic indicators will help homeowners determine a good time to refinance their homes. For mortgage interest rates to drop the interest rate spread between what banks pay for funds and what you, as a homeowner, will pay the bank must narrow. That's why mortgage interest rates dropped immediately by a third of a percentage point recently after the government took over Fannie Mae and Freddie Mac.

Q: What economic indicators should I be watching when trying to decide when to refinance my mortgage or home equity line of credit?

A: I'd just watch the price of the mortgages themselves. Right now, we're waiting for interest rates to drop further. But interest rates have become rather volatile. For mortgage interest rates to drop the interest rate spread between what banks pay for funds and what you, as a homeowner, will pay the bank must narrow. (With so much uncertainty in the financial markets, the increased risk is being priced into the mortgages, which is why interest rates haven't dropped much.)

That's why mortgage interest rates dropped immediately by a third of a percentage point recently after the government took over Fannie Mae and Freddie Mac. (Interest rates rose again after a few days due to market conditions.)

While the government position in these companies took some risk out of the market and reassured investors that the government would stand behind those mortgages, home mortgage interest rates are still high relative to some of the interest rates they're supposedly tied to. Why? It's all about fear. Banks are afraid to lend to each other and they're afraid to lend to homeowners, and just about everyone else. The current credit crisis is really a crisis of confidence.

I'd watch for interest rates to go down, possibly before the U.S. Presidential election in November. You can track what various lenders in your area are charging for home mortgages by using the search feature in www.bankrate.com.

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