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 6^th, 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