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Listen, Joe, here's what's happening

Don't ask the average guy in the street what's making mortgage rates dance up and down every week. He's miles away from egghead economists who chart "market indicators" behind the scenes, and from the deficit-cutting battle going on between the White House and Congress.

In fact, a lot of Joe Doakses feel like jerks every time they read about a "rise" or "fall" in long-term bond yields. The reason, of course, is that Wharton School grads they're not.

Yet, all those factors influence the monthly payment Joe makes on a new house, or whether he and the wife should refinance their current abode now or wait.

Joe wishes someone would sit him down on a park bench and explain in simple English what in Sam Hill is going on.

Let's give it a try:

Joe: Why are mortgage rates flip-flopping?

Answer: Bond yields. They're being driven by hot-and-cold expectations about where the economy is headed. That translates into the raw numbers in the bond market. Mortgage rates rise when bond yields rise.

Joe: What's a "bond price" and a "bond yield," anyway, and why does this particular animal run the show? Why not other interest rates, like the prime?

A: Bonds, in particular 30-year Treasury bonds, have the same term as a 30-year, fixed-rate mortgage. They compete for the same investors. The bond price is what you'd pay for the bond; the yield is the return.

The price is expressed as a percentage of the face value of the bond. For example, if you could buy a $10,000 30-year bond for $9,000, you'd be buying it at "90," as they say.

That would be a discount, so the real return, or yield, on the bond would be higher. In this case, if the yield printed on the bond was 8 percent, your real yield would be 8.89 percent.

Bond yields are different from the prime rate. Prime reflects economic conditions today. Bond yields are a sign of what the financial markets think tomorrow will be like.

Joe: So what's the trend? Should I refinance now?

A: Yes, if the numbers are right for you. Your new rate should be at least 2 percentage points below what you're paying now and you should plan to stay in your home at least another three years. You'll need that long to recoup the mortgage application and closing costs. Truth is, despite all the noise about inflation, the average 30-year fixed mortgage rates hasn't fluctuated more than a fifth of a percentage point in the past three months.

Joe: What could happen to change the situation?

A: Under the best of circumstances, mortgage rates will hold or even dip a bit while the economy slowly improves. The numbers will rocket if President Clinton's deficit-cutting legislation is abandoned, the economy overheats and the Federal Reserve does nothing to hold rates in line.

Joe: What about my auto loans, credit cards and home equity payments? Won't they skyrocket, too, if bond prices take off?

A: They're "out of the loop," as George Bush used to say. Their rates move based more on current economic conditions and things like CD rates. Those numbers are still dropping, just as they have been for the past several years.

Joe: How can I figure out all of this myself, without keeping an economist chained in my basement? What do I watch?

A: Ignore the experts. Take a poll on your street and in your office, asking these questions: How are things looking at work/home? Do you think you'll replace the old jalopy this year? And, what are you and the family going to do on vacation this year? The answers will tell you if the economy is going to improve. If it's not, rates hold steady or fall.

Joe: Let's talk savings rates. How come those ugly 2 percent and 3 percent yields on my CDs aren't following mortgage rates whenever they rise?

A: You've got to be kidding. Do you think banks are going to pay you more interest when they don't have to?

Latest rate trend: The banks simply don't believe rates are rising. Everything is flat. CDs aren't moving, and Bank Rate Monitor's ratio of savings rate increases to decreases is an even 1-to-1.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from his office in North Palm Beach.

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