Good news in your paycheck -- bad news for your mortgage rate

December 07th, 2010

The relationship between the economy and mortgage rates often has us at odds with ourselves. Do we feel good about bad news or bad about good news? Mortgage calculators are immune to news, they just show the results based on numbers you input. Mortgage rates, however, can move in response to both good and bad news. News today may leave you with mixed emotions if you are considering a mortgage refinance or new home loan.

Hooked on a feeling

Bad economic news means people are losing jobs and income. Bad economic news is higher unemployment rates, local stores and restaurants closing and perhaps your brother coming to stay with you for a while. Confidence is down regarding the economic future which causes you to save more and spend less. Of course so are your neighbors, which is why the corner café has closed.

Bad economic news can leave you feeling down even if you still have your job and know that it is secure in the down economy. With constant bad news in the paper, on the television, on the radio and at the water cooler it is easy to get used to feeling blue, it is hard to feel upbeat when surrounded by downbeat.

Turn that frown upside down

One way to feel upbeat is to use refinance calculators to show you how much you can save on your monthly mortgage payment. If you have been considering a new home loan and using prequalification calculators to determine your loan qualifying amount your spirits rise with the qualifying loan amount due to historically low mortgage amounts.

Whenever you can improve your personal economic condition, your personal emotional condition tends to improve as well. The mortgage rates the past several months have had millions of Americans feeling pretty good as they locked in low mortgage rates for refinance mortgages and new home loans.

With recent events some of the happy-days feeling will be eroding for many who have been using the mortgage calculators and have yet to submit their mortgage applications.

Bad brings good as good brings bad

A fundamental tenet of the mortgage industry is that for consumers, bad economic news is good mortgage rate news. Higher unemployment? Rates should drop. Slower economic growth? Mortgage rates go lower. Forecast of continued recession? Watch rates trend lower week by week.

Conversely, positive economic news tends to push rates upward. Economy grew in the last quarter? So will mortgage rates. Employment rising across the country? Along with interest rates. Consumers spending more at the stores? So will new homebuyers with higher rates.

You may have been reading and hearing about the negotiations this week between President Obama and the Republicans in Congress about extending the current tax rates. These tax rates were put into place in 2001 and 2003 under President Bush. At that time, under the agreement between Bush and the Democrats in Congress, the tax cuts were set to expire at midnight on Dec. 31, 2010. Unless Congress extends the current tax rates and the extension is signed by President Obama, everyone's taxes go up on Jan. 1, 2011. Higher taxes means more money out of your paycheck.

Yesterday Obama announced that he and congressional Republicans have reached a compromise and the current tax rates will be extended for two more years. Good news for you as it means your take home pay will remain the same and not go down.

Good news unless….

A fundamental tenet of the mortgage industry is that good economic news usually means higher rates. The tenet is in play today as Mortgage Backed Securities (MBS), U.S. Treasury bonds and other securities plunged in trading on the news of the tax cuts and the other part of the compromise between the President and Congress, the extension of unemployment benefits for several million Americans. Prices dropping in bond markets mean higher yields or interest rates.

At the same time fearful for the added debt to the U.S. deficit and hopeful that the tax rate extension will spur individuals and companies to loosen up their wallets and spend on goods, services and new employees, investors reacted by dumping their bond holdings. The 10-year Treasury yield jumped to its highest rate since late June and is three-quarters of a percent higher than its low in early October.

Good news is bad news; bad news is good news. Take your pick of which you want, but lately the personal good news of lower taxes in the future has resulted in bad news of higher mortgage rates for your refinance mortgage or new home loan application. Use your mortgage calculators to determine your course and submit and lock in your mortgage application sooner rather than later. More good news may be on the way…

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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