In an effort to keep people in their homes and encourage more home purchases, the Federal Reserve’s actions to reduce interest rates have been a success. Many homeowners have taken advantage of low rates and have purchased homes or refinanced their current mortgage. However, prospective homeowners who have not taken advantage of the savings should consider acting soon because many industry analysts say the low interest rates may soon end.
Mortgage rates have seen an astounding drop to as low as 4.5 percent after President Obama’s mortgage refinance stimulus plan was announced as well as the Federal Reserve announcement last November about their plan “to buy as much as $500 billion of securities backed by Fannie Mae (FNM.P), Freddie Mac (FRE.P) and Ginnie Mae.” Mortgage experts are now warning that the low interest rates for mortgages are not going to last. Celia Chen, senior director of housing economics at Moody’s Economy.com in West Chester, Pennsylvania says, “The downward trend we have seen in mortgage rates will not last beyond the first half of this year.” She continued to say, “By then, the Federal Reserve’s program will have run its course and other issues will move to the forefront that could push mortgage rates higher.” Chen also said, “By the first quarter of 2010, rates should be at 5.87 percent.”
The reasons the interest rates will start to increase include an increase in government debt and a positive outlook that the economy is beginning to rebound. This may be the perfect time to secure a mortgage or refinance an existing mortgage because as the economy begins to recover, interest rates will begin to rise. For instance, economic analysts have recently reported that “last year, the yield on the 10-year treasury was only about 2%. Recently, there has been an increase to over 3.5%.” The result will be that interest rates on loans and mortgages will start increasing again. As well, 30-year loan rates have seen a jump. Recently, the average interest rate rose to 5.27%. This is up from about 4.75%.
Greg McBride, senior financial analyst at Bankrate, Inc, in North Palm Beach, Florida, says, “Expectations of a 30-year fixed-rate mortgage at 4.50 percent are too ambitious. Inflation worries may begin to spook investors and that could send Treasury yields higher, which would cause a corresponding move in higher mortgage rates.”
Cameron Findlay, chief economist at online loan broker LendingTree.com in Charlotte, North Carolina, says “mortgage rates at 4.50 percent remained possible, but not probable.” As well, Moody’s Economy.com has forecasted interest rates at “4.5% by mid 2009 after dipping to a low of 4.37% in the second quarter. In the third and fourth quarter, rates are expected to rise to 4.57% and 5.18 %.”
If the increase in rates continues, people who are considering refinancing an existing mortgage, buying a new home, or selling their new home, may miss out on a great deal if they wait too long. This may be the best time to lock into a low interest rate mortgage.
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Mortgage Rates FAQ:
Question: How do current mortgage rates help new home builders?
I’d like to buy new construction as a result of the great mortgage rates right now. However, by the time I’d close on my house in December, it could be a totally different ballgame and rates could go through the roof. It seems to me, then, that low mortgage rates only help people refinancing or buying an existing house.
Answer: Most economists predict that interest rates and home mortgage rates will remain low for some time to come. There may be some slight increases later in the year as the economy and the housing market improve but the rates are at record lows and now is the perfect time to buy a new home.
Have you spoken with a lender? It is possible to lock-in a rate for a small fee and thereby guarantee that you will not see substantial increases.
Question: What is the best way to shop for mortgage rates?
I have been pre-approved by a local very large bank known for their mortgages of which I am a customer. I know the lender. Once my short sale is approved I will get my first rate & points from him. Then is it best to shop on the internet or go in person to other banks? Do credit unions or online mortgage companies offer better rates and less points than nationally known banks?
Answer: Good luck getting your short sale to the closing table, about 10% get there, which is pathetic. Do not go to internet lenders, they promise all sorts of stuff up front, but the final package is usually much different than originally discussed. Go to different mortgage brokers and compare fees. Make sure they don’t run your credit every time. Just tell them you are shopping for a loan and see what they have to offer. Banks like Bank of America will only have one way to give you money and that is their way. Mortgage brokers work with a lot of different banks. Keep that in mind when shopping around.
Question: What are the current mortgage rates like and are there any signs of the mortgage rates changing soon?
I’m looking to get the best current mortgage rates available because me and my wife are looking for our first home purchase. Can anyone point me in the right direction?
Answer: There is no such thing as a standard rate as there was 20 and 30 years ago. The rate you get depends on your credit rating, the type of loan you want, the down payment you put down, the points you pay up front to buy the rate down and other things.
The very best thing you can do is ask friends and family that have gotten mortgages recently and is happy with the service. Even large mortgage companies have crooks working for them- use someone local, competent, and recommended. The rates are very similar between companies because they are all getting their money form the same source.
I think that rates will remain low for a while. But when we start recovering from this recession I think inflation will jump quickly and the mortgage rates will also.
Question: What are mortgage interest rates based on and how do I estimate what my ARM rate will be when it adjusts?
My 5-1 ARM adjusted last year and went to 6.25%. It will adjust again this November. Are mortgage rates based on the feds fund rate? Or something else? How can I estimate what my new rate will be?
Answer: There are multiple indices that are used by mortgage holders to adjust a mortgage rate. Some are tied to t treasury bills, some are tied to the LIBOR rate. You will need to check with the mortgage holder, (or just check your original mortgage contract) and find out what index your mortgage is tied to, and what the”spread” is. (The spread is the additional % added to the index).
Question: What caused the home mortgage rates to sky rocket, causing people being unable to pay their monthly mortgages?
The recession was caused by people being unable to pay back their home mortgages because the mortgage rates were too high? Banks were not getting their money back from home owners, causing a credit crunch, thus they were unable to lend money to big businesses. Big businesses then had to cut back on expenses and began to lay people off the the thousands. So what caused the mortgage rates to go up so high that started this financial mess in the first place?
Answer: A simplified answer is that during the Clinton admin, there was a Dem push for making banks loan money to underqualified minorities, called the Community Development Act. Barney Frank and Chuck Shumer, both dems pushed Fannie Mae and Fannie Mac to underwrite these types of extremely risky loans. Eventually, the financially underqualified loans resulted in the foreseeable; you shouldn’t loan money to people who you know thru history will not be willing or able to repay it..and the bubble burst.
Question: Why do mortgage rates go up when the term goes up?
I’m looking at mortgage rates for closed term, ranging from 6 months to 10 years, and I’ve noticed that the rates actually increase as the length of the term gets higher. Why is this the case?
Answer: The general “rule” in banking and in finance is that the longer the loan, the higher the interest rate. The reason is that the lender takes on more risk with longer term loans. For example, if the lender commits to a fixed rate 10 year loan to you, but rates rise sharply within 3 years, they lose out on getting that higher interest rate. (conversely, if rates fall, then the bank wins on that fixed 10-year loan to you).
Question: Is it true that Mortgage rates go up usually in summer and come down during the end of the year?
I am planning to get a home in Bay Area. Is it true that Mortgage Rates usually go up in summer and eventually calm down during the end of the year?
Answer: I suppose in theory the demand for housing may be heavier in spring and summer in some areas, and someone is trying to say that housing demand influences mortgage rate in some way, but I doubt it’s true. Certainly not everywhere and at all times.
Mortgage rates fluctuate according to the bond market — supply and demand of money and credit. Predicting the Bond Market is almost as impossible as predicting the Stock Market. Professionally, baring unforeseen circumstances (a HUGE qualification, BTW) , I would hazard to guess that tomorrows market will look a lot like to days market. Beyond that, only a fool would make a prediction backed by serious money..
Question: How does the unemployment rate affect mortgage rates?
From regression analysis I found that there is a strong positive relationship between the unemployment rate and mortgage rates. I can’t figure out why. Any thoughts?
Answer: You need to be careful, mortgage rates are prospective rates and unemployment data is retrospective data. Data collected at time t may in fact reflect time t-1 and forward rates at time t+359. Further, the mortgage market has itself changed over time being deposit funded and insurance reserve funded twenty years ago and mutual fund owned today. That creates different owners with different liabilities.
Finally, time series regressions are very difficult to do correctly. It is an entire field in itself.
Unemployment is related to bond prices because higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices, so there should be a positive relationship with prices but a negative relation with rates. However, a mortgage could be thought of as 360 forward obligations and the current unemployment level does not reflect future beliefs about the economy in a direct manner.
If you find a positive correlation that is very strong, there is also a possibility that you have a unit root problem and your t-tests are misspecified. The significance could be spurious. It partly depends upon whether the relationship is stationary or not. If you are running your tests using an ordinary statistics package, it is likely your correlation method is invalid.