Question: According to the Market Gauges in today's New York Times, the federal funds interest rate has dropped from 4.25% to 0.25% in the past year. Yet the rate charged homeowners for a 15 year fixed mortgage has dropped only from 5.33% to 5.05% in the same period of time. I wonder whether such discrepancies are historically typical, and what might be the typical time lapse before the mortgage rate drops proportionately to a reduction in the rate that banks charge each other to borrow money. Alternatively, does the discrepancy reflect the reluctance of banks to loan despite their receiving the TARP funds? This is of practical interest because I am contemplating refinancing my home mortgage and wonder how advisable it is to wait, assuming mortgage rates are likely to drop further as the effects of reduction in the prime rate will eventually trickle down to benefit consumers. Eric, Amherst, MA

Answer: If history is any guide, mortgage rates should drop farther, even though they are already at their lowest level since Freddie Mac started publishing the data back in the early 1970s. For instance, as I am writing this the yield difference between a 30-year fixed rate mortgage and the 10-year Treasury bond is 3.11 percentage points. (The 10 year Treasury bond is the benchmark interest rate for pricing mortgages.) The quick rule of thumb is that gap is normally about 1.5 percentage points, suggesting that the yield on the 30-year should be 3.61%. That's way below the current rate of 5.27% on the 30 year fixed rate. The interest rate on the 15 year mortgage would be even lower, closer to 3% instead of its current 4.83%. (Rates have come down slightly since you emailed your question which accounts for the different interest rate figures.)

History is one reason to suspect mortgage rates could go lower. Emerging signs of deflation or falling prices is another. And the government appears eager for mortgage rates to head lower. It's a good way to support the housing market since lower rates encourage refinancing and new home buying.

That said, we're living through a period where common rules of thumb are suspect. What's more, the government's ability to manipulate long-term bond yields is limited. Investor wariness about securitized mortgages is hampering the market's recovery. Lenders are wary of anyone with less than a stellar credit score. The housing market continues to deteriorate. All these factors are keeping mortgage rates historically high relative to Treasury yields. There's also the risk that at some point all the money the government is pumping into the system will ignite inflation fears.

What's the homeowner to do? Think through the downside. What if you wait for lower rates, and mortgage yields go up instead? How much of a difference will that make to your household finances? In other words, does it pay for you to bet on lower rates because it doesn't matter much to your overall finances if rates stay where they are or go higher and you can't refinance? Or is there a wide enough gap between your existing mortgage and current mortgage rates to make a refinancing financially sensible? if that's the case, why not refinance even if you do miss bottom? These are the kinds of questions and scenarios I would run through, always with an eye toward protecting yourself agaisnt the downside.