Rate Reduction: Time to Refinance Your Mortgage?

March 21 -- Now that the Federal Reserve has cut interest rates once again, is it time for you to refinance your mortgage?

While history indicates that it may be, there are a few potential variables — from mortgage-backed securities to the Nasdaq Composite — to keep an eye on.

Though the Fed's stance on interest rates can signal a longer-term trend for the direction of mortgage rates, it's not inevitably the case. Investors who are trying to time the market might be disappointed with the results.

First of all, mortgage rates often move ahead of what the Fed does, say economists, making timing mortgage rate moves a tricky endeavor.

In 2000, for example, the Fed raised its key interest rates in February, March and May. Predictably, the rate on the 30-year fixed-rate mortgage rose steadily during the same time period, reaching a peak of 8.64 percent the week ended May 19, according to Freddie Mac. But after that, rates on the 30-year fixed-rate mortgage declined until the end of the year, when the rate hit 7.13 percent on Dec. 29, just a few days before the Fed lowered rates on Jan. 3, 2001.

"The market anticipated what the Fed was going to do," says Freddie Mac chief economist Robert Van Order. "In some sense, effects sort of precede their causes."

The Homeowners' Game Plan

If this is the case, what's a homeowner to do? At a rate of 6.97 percent for a 30-year fixed-rate mortgage for the week ended March 9, mortgages are hovering around their 30-year lows. At that rate, it probably makes more sense to go ahead and refinance.

"It's hard to believe that rates are going to get a lot lower," says Van Order. "It's not going to get a whole lot better than this. If you've got a good deal and you want to refinance, deferring it isn't going to make that much sense."

Plus, if you have a mortgage that has no points and no closing costs, if rates do go down dramatically, you can always refinance again, says David Beadle, president of BestRates Inc., which publishes an online mortgage site that provides mortgage rate information and analysis.