If you have an interest in financing or refinancing an unusual window of opportunity may now be closing. Mortgage rates at this time are as low as they've been in decades, but whether such interest levels can continue is less certain each day.

• The 11th District Cost of Funds Index (11th District COFI), an index used with many adjustable-rate mortgages, fell in December to 2.375. This is the lowest rate for this index since records have been kept. Add a margin of 2 percent or so the index and many 11th District ARMs will have full rates below 4.5 percent.

• The one-year London Interbank Offering Rate (LIBOR) reached 1.477 in January. Same deal: add a margin of 2 percent or so to the index and the full rate for LIBOR ARMs will be below 3.5 percent.

• While ARM rates can rise and fall during the loan term that's not the case with fixed-rate financing. Fixed-rate loans -- after rising a touch in January -- are once again well-below 6 percent. For the first week of February, say Freddie Mac, at typical fixed-rate mortgage was priced at 5.88 percent with .7 points -- a full percent lower than a year earlier.

The question now emerges as to whether such rates can continue. The past few years have been great for borrowers because rates have generally declined and home prices have generally risen. The result is that in many markets, but not all, homes have remained affordable, owners have had an appreciating asset, homes sell quickly and monthly payments have not been overwhelming.

But we now have a situation where economic conditions are in flux, including some conditions which may well impact interest rates.

The federal government is expected to have a $300 billion deficit in the coming year and probably more when the bill for Iraq is finally totaled. The result is that the federal government -- and many state governments with deficits -- will be competing for dollars with other borrowers. More demand from government will increase the pressure to raise interest rates.

The war with Iraq, something which at this writing seems entirely certain, has two dimensions which may impact interest rates.

Should the war go forward it's likely that the federal deficit will increase significantly -- how much is unknown but a brief engagement could cost tens of billions of dollars while a protracted fight could potentially total several hundred billion dollars. Such expenses would be an additional federal cost above the expected deficit.

War with Iraq also means oil prices will likely rise. Steeper oil prices, in turn, will mean higher household costs and fewer consumer dollars for other purchases, elevated levels of inflation and higher loan rates.

Lastly, there's the matter of reality. It's not believable that stock values will eternally increase, the Lakers will always win the NBA playoffs, or that interest rates will forever fall. It's reasonable and rational to suggest that at some moment mortgages rates will start to rise for an extended period.

Is now the time?

There are no infallible guides when it comes to predicting the future -- including this guide, but the substantial events now occurring cannot be ignored. The interest-rate decline experienced during the past few years has been a great ride for borrowers but it has to end at some point. At the very least, those with an interest in financing and refinancing should watch the mortgage market with care during the next few weeks to see which way the financial winds are blowing.

For more articles by Peter G. Miller, please press here.

Published: February 11, 2003

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