Mortgage Rates Going UP? Probably!

It has been a great ride for home owners and purchasers.   Thirty year fixed rate mortgages have hovered between 4.75% and 5%% for the last 15 months.  But times are changing.

In response to the rapidly deteriorating housing and mortgage market in 2009, the Federal Reserve announced its intention to purchase $1.25 Trillion dollars in Mortgage backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.  Why this unprecedented move?  As the housing market convulsed in 2008 and 2009, many investors who had been purchasing these fixed rated securities backed by mortgages grew leery of any investment backed by mortgage on homes with rapidly plummeting values and high default rates.

In stepped the Federal Reserve, and their weekly purchases shored up the mortgage market.  They paid relatively high prices for these securities, and kept interest rates low.  This program allowed many homeowners in “toxic” mortgages to refinance, and provided once-in-a-lifetime opportunities for buyers to lock in very low, long term rates and housing payments.

As this program came to an end on March 31, 2010, the question on everyone’s mind was this:  what will happen when the biggest purchaser leaves the market?  Will private investors have enough confidence in the recovery of the housing market to fill that void as these securities are offered up for purchase?  Or will the supply of new mortgages exceed the demand, driving prices lower and, therefore, their yield and the mortgage interest rates higher?

At the time of the writing of this article, April 9, 2010, that seems to be the case.  When there is volatility in the mortgage and bond markets, the Fed is no longer around to smooth out the bumps.  As a result, mortgage rates will rise and fall with the investor’s demand, or lack of demand, for the investment products.  Lacking a crystal ball, the mortgage group at UFCU is thinking we may see a high of 6% before year’s end.  One caveat:  the housing market in the rest of the country is still quite fragile.  If this withdrawal of very low rates causes tremors in the recovery, we could see more governmental help.

What to do now?  Take advantage of really low rates to buy or refinance now.  The price a home buyer can pay for a home is in direct relationship to the interest rate and resulting payment.  Buyer’s expectations may have to be scaled down.  Refinancing may not make sense as rates rise.  For advice and a consultation, call 512-997-HOME.