You'll Get The Best Mortgage Rates If You Watch Certain Patterns

When it comes to mortgage rates, sometimes it's better to "act now".

On Tuesday, mortgage rates fell to their lowest levels in 4 years. It happened because the Fed said it would "employ all available tools" to resuscitate the economy.

On Wednesday, however, the markets had second thoughts.

After considering the long-term implications of a near-zero percent Fed Funds Rate, and the cumulative cost of government intervention to-date, suddenly, traders grew fearful that U.S. government action would devalue the dollar and lead to inflation -- the enemy of low mortgage rates.

As a result, mortgage markets unwound.

At first, the exit was slow and orderly. Then, without warning, investors began a full-on sprint for the exits. By the end of the day, mortgage rates were higher by as much as a half-percent. Nearly all of Tuesday's big gains were erased.

In hindsight, the reversal Wednesday wasn't all that surprising -- it's the same trading pattern we've seen twice already this year. The first time was after the Fed's "surprise" rate cut in January, and the second time was after the federal takeover of Fannie Mae and Freddie Mac in September.

Sharp rate drops tend to be followed by immediate bounce-backs, it seems.

But, unfortunately, not every would-be refinancing homeowner saw the increase coming. While those that locked at the first opportunity to save money are sitting pretty today, the rest that "waited for rates to go lower" are likely kicking themselves about it.

Going forward, mortgage rates may fall, or they may not. We can't possibly know. But, we've now seen the pattern 3 times -- when mortgage rates plunge like they did Tuesday, they rarely stay that low for long. When you find a rate you like, get in and get locked as soon as possible.

Sleeping on it for even one night may end up costing you dearly.

(Image courtesy: The New York Times)

No Matter What Happens To The Fed Funds Rate Today, Markets Are Going To Turn Up The Volatility A Notch

The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank's press release.

In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.

It's this last point to which mortgage rate shoppers should pay attention -- when the Fed Funds Rate falls, mortgage rates tend to rise.

The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.

In theory, over time, Fed Funds Rate cuts work to improve Corporate America's balance sheets, thereby rewarding shareholders. Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up. Part of that process, of course, includes selling the "safe" parts of their portfolio which are usually loaded with mortgage-backed bonds.

If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.

The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:

• A "pause" is expected by 2 percent of traders
• A 0.250% rate cut is expected by 5 percent of traders
• A 0.500% rate cut is expected by 45 percent of traders
• A 0.750% rate cut is expected by 40 percent of traders
• A 1.000% rate cut is expected by 8 percent of traders

Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their "bad bets". This will add to market volatility for sure.

Mortgage rates are calm this morning. The calm likely won't last. If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.

The Week In Review (December 10, 2007) : What To Watch For

Among lingering doubts about housing and credit markets, and a general uncertainty about the U.S. economy, the mortgage bond market tanked towards the latter part of last week.

As investors moved away from mortgage bonds, mortgage rates forcefully bounced off their two-year lows.

A major factor behind last week's run-up in rates is the market expectation for Tuesday's Federal Open Market Committee meeting.

Those expectations sharply shifted after Friday's strong employment report from the Census Bureau and dragged rates along with them.

Prior to the jobs report, markets were expecting that the FOMC would lower the Fed Funds Rate by a half-percent. After the report's data showed inflationary hints, though, that expectation changed to a quarter-percent.

This is important to mortgage rate shoppers because inflation is the enemy of mortgage bonds. Typically, as inflation rises, so do mortgage rates.

The FOMC adjourns from its one-day meeting Tuesday and will make an announcement to the markets at 2:15 P.M. ET. Expect volatility before and after the press release.

Currently, the Fed Funds Rate sits at 4.500%.

Also hitting the wires this week is the Consumer Price Index (Wednesday) and the Producer Price Index (Thursday). These two reports are closely tied to inflation, too, so if the readings come in hotter than expected, mortgage rates will move higher in response.

CPI is also known as "The Cost of Living" index. PPI is its "business" counterpart.

(Image courtesy: The Wall Street Journal Online)