Refinance Mortgage, US Dollar

I hope you have enjoyed this special day of 10/10/10. This will cover the topics of refinancing a mortgage as well as valuation of the US Dollar. First is the weekly recap from Vanguard.

Vanguard

Despite welcome news that service-sector activity expanded in September, the week ended with a downbeat employment report. Instead of an expected no-growth September, the report showed a weak gain in private-sector jobs wiped out by a decline in public-sector employment, for a net loss of 95,000 jobs. For the week ended October 8, the S&P 500 Index rose 1.6% to 1,165 (for a year-to-date total return—including price change plus dividends—of about 6.1%). The yield of the 10-year U.S. Treasury note fell 13 basis points to 2.41% (for a year-to-date decrease of 144 basis points).

Refinancing a Mortgage

This week the average rate for a 30 year mortgage reached the very low rate of 4.27%. The Federal Reserve has stated that starting in November they may purchase long term US Treasury bonds that may reduce this rate even further. So if you have a mortgage and you have a rate above 4.5% now would be a good time to investigate refinancing it. In fact, this week I refinanced our mortgage and reduced the length of the mortgage using the adage that a bird in the hand is worth 2 in the bush.

Refinancing can be done a couple of ways, traditional and no-cost. The traditional way is to get the very lowest interest rate and pay closing costs which can be expensive. I chose the no cost option and paid a little higher interest rate without paying any cost. The reason for selecting this option is if the Federal Reserve does purchase enough bonds to drop mortgage rates even further I want to take advantage of it.

Conventional wisdom with a traditional refinance is that the interest rate has to drop about 2% to recoup the finance costs. I can not imagine that Federal Reserve buying enough bonds to drop the 30 year mortgage rate to below 3%. I can imagine a 0.25% to 0.5% drop. With the no cost method, I can refinance once again and take advantage of the even lower rate. Even if interest rates do not drop, I am happy with my new lower interest rate.

Valuation of the US Dollar

You may have noticed that the cost of gasoline went up this week. Is the cost being manipulated or is some free market forces at work? The answer is the value of US Dollar dropped this week, especially versus the Euro, causing this increase. While European countries have adopted a strategy of reducing their national budget deficits the US government is continuing to grow its budget deficit. This means that the US is printing more money relative to the European nations which lowers the value of the US Dollar.

Things such as commodities that are purchased internationally, like copper and oil, are going to go up because it takes more US Dollars to buy it. Given the current strategy of continuing to grow the US economy by going further in debt and printing more money this trend will likely continue for awhile. A falling US Dollar is also very good for US manufacturing companies as it lowers the cost of goods sold internationally.

The way to make money with a falling US Dollar is to purchase a mutual fund that invests internationally. Just like commodities going up, so will the value of other things purchased internationally such as stocks. If you know it is going to happen, you might as well take advantage of it.