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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?
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