"The yield curve's inverted!" "The yield curve's inverted!"

OK, so it's not quite as exciting as Paul Revere's warning about the redcoats. But borrowers should pay attention when they hear this cry from financial types because an inverted curve matters to them, whether they realize it or not. In short, the phenomenon has made some home loans look better than they did a few months ago while making others look worse. The key is knowing which is which.

Snapshot of yield curve on Feb. 2, 2000

First, though, let's talk about what this whole yield curve thing is. There are several U.S. Treasury securities that market players use as benchmarks to price various products, including mortgages. These include 1-year and 5-year Treasury bills, 10-year Treasury notes and 30-year Treasury bonds.

Each has a particular yield. If you consider each of those yields a point and draw a line on a graph starting with the yield on the shortest-term security and touching each point all the way out to the yield on the longest-term bond, you get a graph that looks like half of a "U" on its side, prong to the right. This is the yield curve.

Usually, longer-term debt securities yield more than shorter-term ones. After all, there's a greater risk that inflation will eat away the value of a security sometime in 30 years than in one. This gives you a curve with its lowest point all the way to the left and its highest one all the way to the right.

But when it appears the Federal Reserve Board is going to hike interest rates aggressively over the short-term -- and that those hikes will stamp out inflation in the long run -- the curve changes. It gets steeper on the left because the yields on those securities are most affected by Fed rate increases. But it drops on the right because long-term bonds start looking less risky because the Fed is moving to tame inflation. This shift moves the highest point in the curve from the right end more toward the center or left end. The resulting graph is what people call an "inverted yield curve."

"The primary driver in the past for a yield curve inversion has been Fed action, where the force at work in the marketplace is the Fed increasing the cost of short-term funds," says Mel Steele, senior vice president of secondary marketing for PNC Bank Corp. of Pittsburgh. "It's a reflection of the Fed's resolve to remove or minimize inflation in the economy, so I don't need as much of a risk premium at the long end."

The yield curve started inverting in mid-January and the pattern persisted through Groundhog Day. Long-term yields fell even further when the U.S. Treasury, flush with cash due to the budget surplus, said Feb. 2 that it will reduce government sales of new securities and buy back old ones -- mostly at the long end of the curve.

What does this trend mean for mortgage rates? Consider that right now, the peak of the curve is in the 2-year to 5-year maturity range. Because long-term Treasury yields (10-year and 30-year) are slightly lower, long-term mortgage rates have stabilized after a steady upward climb. That gives people on the hunt for 30-year or 15-year fixed rate loans a chance to lock in a relatively decent rate.

For borrowers who want intermediate-term adjustable-rate mortgages, such as 3-year, 5-year and 7-year ARMs, the game has changed, too. Since the yield curve's peak is smack dab in the middle of that maturity range, those loans have smaller rate differences between them now, according to Steele. Consumers aren't receiving much more of a rate break by going with a 3-year ARM rather than a 7-year ARM, so they may as well just take the additional years of fixed-rate protection.

"The norm would be a quarter to three-eighths of a percentage point between each of those terms," Steels says. "Now it's squeezed down to where it might be an eighth or less than an eighth."

As for 1-year ARM shoppers, the best advice is: "Act now!" If the Fed continues to raise rates over the next few months, the curve will get even steeper. That would likely drive starting rates on short-term ARMs significantly higher. Be sure you'd still be able to afford the monthly payment if it adjusted higher a year from now, though, because it will if the Fed can't smother inflation in 2000.

The Bankrate.com National Index is based on a Wednesday survey of the 50 largest banks and the 50 largest thrifts in the 10 largest metropolitan areas in the country. These are averages. To find specific rates offered by lenders, go to our mortgage rate search engine.