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False Illusions and What You Need to Know

The Fed's been at it again, offering words that sound encouraging at first blush, confirming that their buying program of Mortgage Backed Securities is indeed working as planned and might be extended as needed. Of course, the media will pick this up and offer their own interpretation, saying "Good news, the Fed's words on possibly continuing their purchasing program mean that rates will continue to drop lower, and remain low into the foreseeable future...." But is this really what that means? Not so.

Here's the truth.

Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present interest rates. Why? First, see the Fed's purchases for yourself by visiting:   http://www.newyorkfed.org/markets/mbs/index.html.
So why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced at today's great interest rates.

Stay with me here...

And this is likely a big reason why the Fed is talking of continuing this program, if necessary. Bottom line, the Fed buying these higher rate coupons will not necessarily help rates to move lower, as their actions do not impact the loans being originated at today's low rates.

Here's the most important part.

Sometimes we talk to clients who are in a situation where it makes sense to refinance right now, and save $250 per month for example. But when they hear the media throwing around teases of lower rates ahead, they decide to hold off on making the decision to save the $250 per month right now, in the hopes of gaining another $30 per month in additional savings with a lower rate than where we stand presently. Now clearly, rates could turn higher, and this window of opportunity could pass them by entirely.

Think about this:

The chances are rates will go higher while waiting to time the market. Call us today to see where the rates are and if makes sense for you to refinance. I you are thinking of buying, now is the perfect time. House prices are down and rates are at all time lows. Let us pre-approve you before you go shopping.