Interest Rates Fall Below 6 Percent, But For How Long?

Recently, the Federal Reserve cut two key interest rates by 3/4 of a point each. Not only did they cut the federal funds rate—which affects interest rates on credit cards and home equity lines of credit—but they also lowered the discount rate, which is the rate banks pay to borrow from the central bank. This 3/4 of a percent cut is the biggest single rate cut since 1984 and is good news for interest rates across the board.

So if you’re thinking that mortgage rates are going to drop over the next few months and that refinancing is a good idea, you’re definitely on the right track.

However, your timing may be all wrong.

Although the rates on a 30-year fixed-rate mortgage are currently below 6 percent, that may not be the case for the rest of 2008. In reality, the window of opportunity may already be starting to close and you may want to take advantage of the low rates now.

The possibility of a recession in the near future has been front-page news lately. However, most economic analysts were talking last year about a recession in 2008 and investors in the mortgage bond market have been shying away for the last several months. In other words, the market had already started pricing in a possible recession and interest rates actually began a slow descent—albeit without a lot of fanfare—in the second half of 2007.

Of course, you may be thinking that future interest rates cuts by the Fed will push mortgage rates even lower. Unfortunately, that may not be the case. Much like reaction to recession speculation last year, the markets have already priced in cuts in the federal funds rate. Unlike years past, everyone knows that more cuts are coming and the market may be ahead of the curve already. Rates certainly could go even lower following any future action by the Fed, but at some point the rates will have to hit bottom—if they haven’t already.

History may not be on your side either if you’re waiting for rates to drop even more. According to Freddie Mac, the last time the national average interest rate on a 30-year fixed-rate mortgage was this low was March of 2004—nearly four years ago. In looking at the big picture, the national average bottomed out in mid-2003 at a record 5.2 percent, which is not much lower than the rates are today.

So it boils down to this: How much of a chance do you want to take? Since everyone—from mortgage experts to economic analysts to real estate agents—agrees that the interest rates are great right now, why would you want to risk higher rates by waiting?  ∆