On January 25th, Fed Chairman Bernanke announced that interest rates were going to be held at the current rate through the end of 2014. He was specifically speaking about the federal funds rate which is the rate the Fed lends money to banks. Most consumers assume that interest rates and mortgage rates are the same. Of course, interest rates do have an influence on mortgage rates but there are many other factors that impact mortgage rates. Mortgage loan officers will quickly tell you that mortgage rates change frequently. In fact, they change multiple times per day. Currently, we have some of the lowest rates ever recorded. But that will not last forever.
There are a number of factors that are likely to move rates higher over time. Mortgage rates are influenced by long-term bonds. The 30-year bond has a big impact on the 30-year fixed mortgage rate. Right now, the Fed is purchasing those bonds through a program called Operation Twist. This is intended to keep the 30-year mortgage rate low. But the Fed cannot keep doing this indefinitely due to our debt and deficit problems. When that program ends, the rates will rise and normal investors must come back to the table to purchase those bonds.
There is also pending legislation for Qualified Residential Mortgages (QRM). This legislation proposes a standard 20% down payment plus a requirement for the banks to maintain a holdback of 5% on every loan. Analysts expect to see these higher bank costs recovered by increasing rates and more fees.
Freddie and Fannie have already implemented additional fees. FHA is expected to also add new fees. The future forecasts from the Mortgage Bankers Association and Freddie MAC predict that rates will rise in 2012 and 2013 back to the 5% range. In 3-5 years, rates are expected to jump significantly. The average mortgage rate for the past 50 years has been 8% and we are likely to see rates in that range again.
Taken from an e-newsletter recently published by The Schneiders of Prudential Georgia Realty
Republished by Jane Nowak CFP® CDFA™ Kring Financial Management, 4045 Orchard Rd. SE, Suite 220, Smyrna, GA 30080
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