Mortgage Reality: The Bad News is Good News Syndrome
If it seems like there is an oversupply of bad news these days for homeowners and mortgage holders, there is one economic phenomenon you should find encouraging. Call it the "Bad News is Good News Syndrome." You see, when the financial markets get overly pessimistic about the economic cycle, interest rates tend to fall. For mortgage holders struggling to meet their monthly payments, falling interest rates could well signal a refinancing opportunity. A recent drop in 30-year mortgage rates suggests that the "Bad News is Good News Syndrome" is alive and well.
30-Year Mortgage Rates
News about the U.S. economy in early March recalled these lines from Shakespeare's Hamlet
"One woe doth tread upon another's heel, So fast they follow."
In other words, the bad news was coming fast and furious: housing prices down, foreclosures up, unemployment rising. Quietly though, at the same time, 30-year mortgage rates took a significant downward step after trending upward over the previous five weeks.
As of March 6th, 30-year mortgage rates had fallen to 6.03%. You can think of 6% as something of a magic number for 30-year rates: historically, 30-year mortgage rates below 6% are quite rare, so when they get down into this territory you can consider rates to be very low.
Supply, Demand and Interest Rates
If all the other housing news is so bad, why are interest rates so good? Consider it to be a simple matter of supply and demand, in a couple different ways.
For one thing, when the economy is hot, there is much demand for credit. Demand for credit will tend to drive interest rates higher. As the economy slows, people stop spending as much. Demand for credit falls off, easing pressure on interest rates.
Then there is the bigger picture. In a strong economy, demand for just about everything is high: oil, durable goods, labor, etc. As a result, the cost of all these things goes up, creating inflation pressures. Inflation drives interest rates up, so rising inflation typically means rising interest rates. In a cooling economy, inflation pressures generally ease, allowing interest rates to fall.
Refinancing Opportunity
So there is some good news in the form of lower interest rates, but it is only good news for homeowners who take advantage of it by refinancing. Since rates in the 6% neighborhood have been rare historically, there is a good chance that an existing mortgage carries a higher rate. This would be a good time to use a refinance calculator and check to see if you could save some money by refinancing.
Also, if you have an adjustable-rate mortgage, this is a good time to look into locking in a low rate by switching to a fixed-rate mortgage.
Most importantly, if you can save money by refinancing, don't hesitate too long before acting. There are exceptions to every rule, and given the overriding effect that higher oil prices are having on the economy, inflation may prevent interest rates from staying low for long. Contact your lender now
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