Vail Daily column: Rates dropping on Fed assurances
Ben Bernanke probably has the thickest skin of anyone around when it comes to taking the heat for things he really has little, if any, control over. But, he is not blind by any means, and probably has more people studying the ins and outs of the economy than anyone in the private sector or the economy. Markets tremble and bankers lie awake at night in anticipation of his next uttered innuendo. When the Federal Reserve Bank sneezes, the economy gets whiplash.
As everyone knows, the Federal Reserve Bank has been supporting the bond markets by infusing more than a trillion dollars in mortgage-backed securities (which are bonds that raise capital for mortgage financing). That program has been going on since 2008 and has driven mortgage rates to the lowest levels in history.
In May, the Fed mused that perhaps it was time to consider “tapering” off its purchases, meaning it would gradually start unwinding its vast portfolio of more than a trillion dollars in mortgage-backed securities and reduce very slowly its support of the market.
That move sent shock waves around the globe. Decreased demand by the Feds would drive down the price and current value of bond portfolios. Dire predictions ran rampant and rumors swirled as fast as the Internet could convey them. Bond prices plummeted as investors fought to be the first one out the door and mortgage rates surged nearly a full point.
In addition, home builders fretted, Realtors complained and home sales dropped off dramatically, as did mortgage loan applications. The reality that rates were still below 5 percent and historically low was lost on the general public, who by then were accustomed to the pleasant thought that mortgage rates that began with three was a nice number and only fools would take a mortgage in the upper 4 percent range.
New home sales and families saving money through refinancing to lower rates have been a key element in plotting the economic recovery. Home sales mean more homes are built, which creates jobs from coast to coast in dozens of related industries, and billions have flowed into consumer spending due to lower interest rates on home mortgages.
Apparently, Big Ben was quite aware of what was happening because last week the Feds announced it would reverse its policy on tapering for the time being. This led to a reverse panic of sorts and bond prices spurted upwards, which drove mortgage rates down again.
The result is that mortgage rates have dropped about half a point or so since the peak a two weeks ago. If you thought you missed the boat on a refinance, then you may have a second chance here.
As to whether a refinance makes sense, keep in mind the old rule of thumb that lowering your rate by a point or more was the only way it made sense is now obsolete. Refinances today can be structured to have little to no closing costs in many circumstances, so if you can lower your rate even by one-quarter percent then it may make sense to do so. A good loan originator can show you exactly how much it would cost to refinance and what benefits will or will not be available.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.