On Wall Street, interest rates like the discount rate, the prime rate, the federal funds rate and the long bond have been falling for weeks. Very nice, many consumers say, but when is my credit card rate coming down? And should I get ready to refinance my mortgage?
The respective answers are, in your dreams and maybe. Credit card interest rates are actually up slightly since last year, according to the Bankcard Holders of America, a Virginia-based consumer group. Mortgage rates have begun to fall and might fall further before the economic recovery takes firm hold.
"In a matter of weeks, mortgage rates below 9 percent will be the norm, rather than the exception" for a 30-year fixed-rate loan, said David Donabedian, an economist at Mercantile Bankshares Corp. in Baltimore. The average for fixed mortgage rates nationally hasn't dipped below 9 percent since 1987.
The difference between mortgages and credit cards is simple: Mortgage rates at most banks are tied to the 30-year U.S. Treasury bond, whose yield has been falling because of the bond-market rally caused by the Federal Reserve's loosening monetary policy. Credit card rates and car loans are usually not ++ tied to any Wall Street rate and are set at whatever the lender thinks the market will pay.
"It's generally the case that when you see Treasury bond yields fall you see lower mortgage rates, but it can happen with a lag," Mr. Donabedian said.
Some credit cards offer rates tied to the prime rate -- the rate that banks offer their best corporate customers. Interest on those cards has fallen as the prime rate has dropped to 8 percent last week from 9.5 percent in January. But those cards comprise about 11 percent of the U.S. credit card market, said Gerri Detweiler, education coordinator for the Bankcard Holders Association.
About 50 percent of the market is held by about 10 companies, including MBNA America Corp., a Delaware company that was part of Baltimore-based MNC Financial Inc. until earlier this year, Ms. Detweiler said. None of them issue large numbers of cards sensitive to broader interest rates.
"The credit card market is not truly competitive," she said. "The big banks charge very high rates, and right now it's very important to keep bringing in those rates because the banks have done so poorly in real estate loans, commercial loans. They're depending on the consumer to keep the bank afloat."
The average interest rate on credit cards is 18.9 percent, slightly higher than the 18.8 percent average last year, Ms. Detweiler said. More than 97 million Americans held more than 260 million bank-issued credit cards (mostly Visa, MasterCard and Discover) the end of last year, and owed balances totaling more than $150 billion.
On the other hand, mortgage rates are falling. The national average for 30-year fixed rate mortgage loans was 9.14 percent last week, down from 9.6 percent in January and a 1990 high of 10.54 percent, according to HSH Associates, a financial publishing firm based in Butler, N.J.
Home financing backed by the Department of VeteranAdministration (VA) is even cheaper at 8.5 percent after a cut Monday; the VA rate is also often used as a guide by banks offering Federal Home Administration-insured mortgages. FHA loans are popular with first-time home buyers because they require little money down.
Keith Gumbinger, a spokesman for HSH, said mortgages get cheaper when bonds prices rise because interest rates on long-term Treasury bonds go lower. The long-bond rate was 7.93 late yesterday, compared to 8.34 percent at the end of July.
As institutional investors look for better yields than Treasuries can offer, more of them buy mortgages from original lenders. That makes the price of the mortgages on the institutional market go up, which lets mortgage rates move lower, Mr. Gumbinger said.
The question is whether that means it's time for consumers to start refinancing their loans. While he doesn't expect anything like the refinancing boom of 1986 -- when mortgages made at early-'80s rates of 14 percent or higher were converted to 10 percent mortgages -- Mr. Gumbinger thinks there will be reason for many consumers with 10 or 10.5 percent mortgages to refinance.
"Don't expect them [rates] to go a lot lower," he said. "This is the best time."
said that consumers usually wait to get a rate 2 percentage points lower than they are currently paying, but it might pay to be more aggressive. "You can do it for less if you can hold down your closing costs," he said.
Tom Champion, production manager at Mortgage Resources Inc. Timonium, said every one-eighth of a point means a $9-a-month difference in payments on a $100,000 mortgage.
And shoppers can hold down closing costs by paying a slightly higher rate to avoid bank fees, he said, while still getting a lower rate than they pay now.
Mr. Champion and Mr. Gumbinger agreed that refinancing costs money up front but pays off if a consumer plans to stay in a !! house long enough for the monthly savings to make up for the up-front cost.
But Tal Daley, economic forecaster and director of equity marketing for Legg Mason, Wood Walker Inc. in Baltimore, said that the best may be yet to come. Mr. Daley, who said he has refinanced his own Towson home, said that interest-rates may be headed way down over the next several years.
"What we saw in the late 1970s and the early 1980s was an anomaly," he said. "The historical norm for long-term Treasury bonds is 5 to 6 percent. I'm not sure they'll go that low, but if things go well it could be 6 percent in the 1990s."