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Path interest rates take affects refinance timing

Mortgage refinancing has popped up as rates have dropped. Assuming you can qualify, is this the time to jump? The average fixed rate for 30-year loans last week was 5.72 percent.

Whether this is the time depends on what you believe will happen to the economy. If the country heads into anything more than a light recession, long-term borrowing rates should fall below today's levels. If the economy quickly recovers, on the other hand, today's lower rates won't last.

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Few economists expect a quick turnaround. The subprime mortgage mess has caused declining home prices, a glut of unsold houses, Wall Street turmoil, declining consumer confidence and increasing reluctance by banks to lend.

Present rates aren't the lowest in recent history. In 2003, the 30-year rate briefly dipped below 5 percent and the 15-year rate touched 4.4 percent. If highly indebted consumers pull back on spending and we head into a bad slump, the 30-year rate could easily fall to 5 percent again for borrowers with good credit scores. A weak economy ought to defuse the inflation threat and lower the demand for borrowed money, thus reducing its price.

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Even so, the inflation outlook isn't nearly as benign as when rates were low in 2002 and 2003. Inflation and interest rates are related because rising consumer prices erode the value of fixed-rate loans.

Demand by China, India and other fast-growing nations has pushed the price of oil and other commodities to the moon, making long-term inflation more of a threat. If the U.S. economy doesn't slow substantially this year, you'll wish you had refinanced now.

jay.hancock@baltsun.com


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