Did you know it is possible for a 30-year mortgage to have the same rate, or an even lower rate, than an identical 15 or 20-year mortgage? It happened to a client this week.
It doesn’t happen often, but it does happen and it’s called a flat or inverted yield curve. Here is a great 3-minute video explaining the concept. (Incidentally, this guy can write backward better than anyone I’ve seen!)
Depending on which credit market you look at — mortgages, corporate bonds, or government bonds — we are very close to this rare occurrence right now. But haven’t officially inverted yet.
Why does it matter?
An inverted yield curve, when short-term rates are higher than long-term rates, has historically been a solid indicator of a coming recession. In fact, all nine U.S. recessions since 1955 were preceded by an inverted yield curve, with the recession following 6 to 24 months later.
The predictive nature of an inverted yield curve seems to be somewhat unique to the United States and hasn’t been as predictive in other world economies, so the measure isn’t a guarantee of recession. There is also an argument to be made that the yield curve may not be as reliable in today’s less-than-free market, with the Federal Reserve applying a heavy hand across the entire economy.
But it is one of the data points I’m watching as we navigate fulfilling clients’ lifetime income needs.
In the meantime, if you’re getting a mortgage and the 30-year rate is lower — take it. We’ll help you self-amortize the payments over your desired term and save tens (or hundreds!) of thousands of dollars in interest.
Our family is headed to Lake Michigan for the coming week. I’m looking forward to some downtime with the most important people in my life and disconnecting from everything else for a few days. If you need anything, Patrick and Stacy are ready to assist.