It may seem as though economic news is all bad these days, but buried under the reports of rising unemployment and slowing GDP is some very positive news: mortgage rates have moved significantly lower. This should get the attention of anyone who would like to refinance a mortgage.

This spells good news for the housing market specifically, since the market gets depicted as the root of most of today's economic problems. In fact, lower mortgage rates are a double blessing for the housing market: they stimulate new buying demand, while offering relief for existing homeowners who are struggling to make their mortgage payments. 

How much this helps the broader economy remains to be seen. Still, on a micro-economic level, lower mortgage rates represent an immediate opportunity for mortgage holders to refinance.

The Mortgage Rate Trend

So far, in January, Federal Reserve Chairman Ben Bernanke's comments have led to widespread expectations that the Fed would lower its discount rate at the end of the month by at least half a percentage point. This would continue a trend of the Fed lowering rates since August of last year. 

Mortgage rates are not controlled by the Fed, but they react to many of the economic trends that determine the Fed rates. Mortgage rates typically do not move as dramatically as Fed rates, but because they are free-floating market rates, they are free to act more immediately. That has been the case this time around, as mortgage rates started moving downward ahead of the Fed action last summer, and they have continued their downward trend into January of 2008. 

The upshot of this is that after being as high as 6.79% last July, 30-year mortgage rates had reached 5.69% by mid-January.

When Will It End?

Anyone looking to refinance a mortgage might be eagerly watching refinance rates trend lower, and wonder how much lower they can go. After all, the talk is that the Fed might have to continue to lower interest rates to stimulate the economy. Precedent suggests Fed rates could go considerably lower: while they ended 2007 at 4.75%, they were at 2.0% less than four years ago.

Once again, though, it is important to remember that there are differences between Fed rates and mortgage rates. Besides Fed rate changes being more dramatic than mortgage rate changes, the Fed exists to manage monetary policy in a way that will stabilize the economy. Mortgage rates, on the other hand, are market rates based on principles of risk and reward. They have no reason to go unnaturally low to stimulate the economy.

So, for example, back when Fed rates were at 2.0%, thirty-year mortgage rates never got below 5.23%. Currently, with inflation at 4.1%, it's questionable whether mortgage rates would venture even that far down.

In short, for homeowners who have seen refinance rates move significantly (i.e., enough to cover closing costs) below their existing rates, there is no reason to hesitate to refinance a mortgage. History suggests refinance rates won't get much lower, and if inflation continues to creep upward, it could really spoil the party.

Sources:

Bureau of Labor Statistics

Freddie Mac

United States Federal Reserve