Most mortgage rates drop, creating refi opportunity

Get out the toothpicks and prepare to use them to prop your eyelids open. We're going to talk about the yield curve. Few two-word phrases are more snooze-inducing, but you risk losing moolah if you doze through this interlude, which might be brief.

The yield curve inverted this week. This rare occurrence creates a refinancing opportunity for some homeowners who have hybrid adjustable-rate mortgages, interest-only home loans, or equity lines of credit. Home buyers should pay attention, too.

"It means go and get your fixed-rate right now," says Ellen Bitton, president of Park Avenue Mortgage, based in New York City. "It's time to consolidate, if you plan on being in the property long enough."

Before we describe what an inverted yield curve means to consumers, let's look at what happened to rates this week. The benchmark 30-year fixed-rate mortgage fell 5 basis points to 6.28 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 5.83 percent; four weeks ago, it was 6.36 percent.

The 15-year fixed-rate mortgage fell 5 basis points to 5.86 percent. The 5/1 adjustable-rate mortgage fell 8 basis points to 5.82 percent. While all of those rates declined, the rate on the one-year ARM climbed 3 basis points, to 5.56 percent.

Gap narrows
Three months ago, the rate on the 5/1 ARM was 64 basis points higher than the rate on the 1-year ARM. This week the difference is 26 basis points. That's the result of a yield curve that has been flattening steadily, and finally inverting.

The yield curve describes the effective interest rates on bonds of various durations. In this case, we're talking about yields on U.S. Treasury bonds and notes. A yield is a bond's equivalent of an interest rate. Normally, bond yields rise as the terms lengthen: A two-year Treasury bond usually has a higher yield than a one-year Treasury, the five-year Treasury note has a higher yield than the two-year, the 10-year has a higher yield than the five-year, and so on.

When you plot these yields on a graph, you usually get an upward-sloping curve. But this week, a dip appeared in the yield curve. The graph, instead of showing an uninterrupted upward slope, looked like a hillside with a well-worn path in the middle of it. That little dip was the inverted part of the yield curve; specifically, the yield on the two-year Treasury was higher than the yield on the five-year Treasury.

Time to ditch the credit line?
The inverted yield curve creates an opportunity to get rid of short-term adjustable-rate debt on your home. If you're buying a house, consider getting a fixed-rate loan instead of an adjustable-rate mortgage, or ARM. If you have an ARM or an equity line of credit, look at the pros and cons of refinancing into a fixed-rate loan.

Bitton, of Park Avenue Mortgage, has a recommendation for people who have equity credit lines that are pegged to the prime rate: Ditch the credit line and either refinance it as a fixed-rate home equity loan, or roll the balance into a refinanced primary mortgage.

The same advice is given by Frank Destra, senior vice president of national sales for ditech.com.

"How we frame it to our customers is that this is an opportunity for you to take advantage of different products," Destra says. For example, someone might have an ARM as their primary mortgage, as well as having an equity credit line. "Well, perhaps you can take this opportunity to get out of your adjustable-rate mortgage and move into a longer-term, fixed-rate product and pay off that home equity, which is causing some customers pain in the short term."

This is especially a refinancing opportunity for people who got interest-only mortgages in the past couple of years, Destra says. The interest-only component usually expires after five years, and payments can rise abruptly. This scary prospect of payment shock might encourage some homeowners to switch to regularly amortizing mortgages.