Q. A few people at work have already refinanced their mortgages at a lower interest rate while I keep waiting for rates to go even lower before I refinance. Every time the Federal Reserve lowers the prime lending rate I keep thinking I will see this rate cut directly transfer to mortgage rates. Why do the interest rates banks pay on certificates of deposit keep nose-diving while mortgage rates have seemed to become stagnant around 7% on a 30-year mortgage? Is this some kind of collusion by the lending institutions?

---L.H.A., by e-mail


A. It may seem like a conspiracy, but it is not. The difference is that one rate--- the Federal Reserve discount rate--- is short term while the other rate, your mortgage, is long term. Basically, we're talking about the difference between being able to change interest rates overnight and being stuck for up to 30 years.

You can see the change in variable rate mortgages. For these mortgages the most common index is the one-year constant maturity Treasury index. That rate, plus an added margin, is your mortgage rate. As recently as last May the one-year constant maturity index was as high as 6.40 percent but it is now under 4.0 percent. As a result, rates on variable rate mortgages have fallen substantially.

That's the good news.

Unfortunately, the typical variable rate mortgage has a margin of 2.75 percent. Add that, and the rate is pretty close to current fixed rates--- 6.53 percent.


Q. I am 32 years old and my father recently passed away. I was left with $82,000 from his life insurance. I am a very novice investor, but the first thing I did was payoff my car and credit cards. This was about $12,000. With the remaining $70,000 I bought a $10,000 CD with a 5-year maturity at 5.87 percent. I have bought $15,000 in stocks and have the remaining $45,000 in a money market index account with a 4.33 percent APR.

I was wondering if I had made good investments so far and was considering using some of the $45,000 towards a bond, mutual fund, more stocks or something. Any suggestions on how to manage the money I have received?

---AM, Dallas, TX


A. I'm sorry about your father.  Although his bequest was modest compared to the gigantic numbers tossed around today, you should know that his bequest has put you in a good position to be in the top 25 percent of Americans for wealth. Here are some things to do and consider:
  • Even if you pay off a car loan the car will continue to depreciate.
  • To avoid the need to take out a new loan in the future, you need to replace the monthly loan payment with monthly savings toward an eventual replacement car.
  • Paying off credit cards always makes economic sense because you'll never have the certainty of such a high return as the interest you'll save by paying off the debt. That said, if you simply make room for new debt you would have defeated the purpose of the payoff--- make certain you pay the balance in full each month.
  • Buying individual stocks isn't a very good way to start investing. It's expensive, volatile, and doesn't provide you with broad participation in the equity market. I'd sell the individual stocks and replace them with an equity mutual fund.
  • If you invest an amount equal to one year of your current income it will probably double about 4 times by the time you are 61 and 5 times by the time you are 68. That means it will become 16 years of income by age 61 and 32 years of income by age 68. It could be your entire retirement program. I suggest a broad tax efficient fund such as Vanguard Tax Managed Growth and Income. The same fund could be a replacement for your individual stocks.
  • As parents, we all wish safety and security for our children. After that we want our kids to have a good time. Having provided substantially for your security, now pick something that your dad would like to know he had helped you do--- and do it. Just remember to thank him.