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California Mortgage Shoppers: Wall Street's Losses May Be Your Gain

By Richard Barrington
Mortgage Credit Problems Columnist


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The stock market grabbed headlines toward the end of February with the worst single-day decline since September of 2001. While investors wait nervously to see what will happen next, mortgage shoppers can use stock market uncertainty as an opportunity to act decisively.

Perhaps you are a first-time buyer looking for a new home loan. Alternatively, you may be a home owner looking to refinance your mortgage or take out a home equity loan for debt consolidation or other purposes. In any case, what is bad for the stock market is often good for borrowers.

Flight to Quality

When investors become nervous about stocks, they flock toward the guaranteed returns of the bond market. This drives interest rates down. For example, when the Dow Jones Industrials Average hit its all-time closing high on February 20, 2007, 30-year Treasury Bonds were yielding 4.78%. However, after the sharp drop of February 27th, the yield on those same T-Bonds was down to 4.62%.

Follow the Market, not the Fed

When tracking interest rate trends, mortgage shoppers should focus on bond market yields rather than on the highly-publicized changes in Federal Reserve interest rates. While the Fed controls short-term interest rates, long-term rates are determined by the trading fluctuations of the bond market. In turn, mortgage loans, which typically have terms of 15 to 30 years, are geared more toward changes in long-term rather than short-term interest rates.

What this Means to You

Currently, rates for 30-year fixed-rate mortgages in California are running about 1.2% over the 30-year Treasury bond rate. That spread is not a fixed percentage, but in general mortgage rates will move up and down in tandem with bond rates. Therefore, if the angst on Wall Street continues, mortgage interest rates may become even more attractive.

Sources
U.S. Federal Reserve
Los Angeles Times: Average Mortgage Rates and Indexes

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