Thursday, January 10, 2008

Mortgage-Meltdown Upside: Lower Rates

Brett Arends writes R.O.I., or Return On Investment, daily for the Online Journal, dissecting where personal finance meets current affairs, and how the latest news can make you money."

A lot of the time, that comes from going against the herd.

Brett has spent his life rifling through department store bargain bins in London, Boston and New York, and that's pretty much the same way he views markets. A good stock-market panic yields the cheapest deals. And there's only one thing better: a scandal. That's when you get a firesale. R.O.I. will be looking for bargains anywhere, and for opportunities on the spending side as well.

It isn't really true that $1,000 saved is just $1,000 earned. If you're in the top income-tax bracket, it's $1,500 earned. And salted away for 30 years in a tax-deferred account, $1,000 saved is nearly $9,000 towards your retirement. That's some return.

Mortgage-Meltdown Upside: Lower Rates
January 10, 2008 7:23 p.m.

The doom and misery enveloping Wall Street brings with it a cheerier by-product: Cheaper mortgages.

The rate on standard 30-year, fixed-rate loans has "fallen about half a percentage point in the last two weeks owing to the dour economic outlook," says Greg McBride, senior analyst at

If you are borrowing less than $417,000, the limit backed by Federal housing agencies, and you are making a down payment of 20% or more, you can get a 30-year loan mortgage for well under 6%., which surveys lenders, says the average rate is now 5.88%. As our chart shows, that's well below levels of nearly 7% seen as recently as last summer.

And you can find better if you shop around. Some loans are as low as around 5.5%, including fees.

Of course, everybody's mortgage decision is going to involve a lot of independent variables, including the size of the loan and the down payment, and whether to get a fixed or variable rate. Interest rates are higher on "jumbo" loans of more than $417,000, and where the down payment is less than 20% of the home's value. There's no such thing as one-size-fits-all advice.

The reason mortgage rates have fallen so far isn't hard to find: Deepening fears over the economy.

Nervous investors have shifted their money from riskier assets into U.S. government bonds, bidding up the price of the bonds and thereby lowering the yield. And that brings down the cost of long-term capital for other loans, including mortgages.

Ten-year Treasurys now pay a measly 3.79%, compared to 5.3% earlier last year. The yield on the 30-year has fallen from 5.4% to 4.32%.

Given these declines in Treasury yields, mortgage rates should probably be even lower. But the lending industry's obvious crisis has gummed up the works.

Are mortgages rates going to fall further? Should you wait to refinance?

Maybe. But rates right now are very cheap by historic standards. The law of mean reversion would suggest they are more likely to rise from this point than to fall further.

Anything from a boost in economic sentiment to fears about inflation would be likely to raise long-term interest rates.

You can usually have it both ways -- sort of. You can generally pay a fee to lock in a good interest rate for a period. If rates fall still further, you surrender the fee, but you can then take advantage of the lower rate.

Overall, cutting your cost of capital is probably the easiest way to boost your net worth. On a $400,000 loan, cutting your interest rate from 6.8% to 5.5% will save you about $4,000 a year before tax -- or about $120,000 over 30 years.

Of course, to make sure switching mortgages is worthwhile you need to factor in fees, points and other costs as well as the interest rate.

Write to Brett Arends at

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