The Fed recently announced they would continue their current pace of purchasing bonds until the economy was stronger. This bond purchasing program is the reason that mortgage interest rates are at historic lows. Rates began to increase over the last several months just on the anticipation that the Fed would announce that they would be reducing the level of bond purchases last month. When that didn’t happen, rates actually decreased (4.50 to 4.37).
That was great news for any buyer in the process of purchasing a home. However, this window of opportunity is expected to close in the very near future as most experts expect the Fed to taper the bond purchasers in December. Even Ben Bernanke, Chairman of the Fed, suggested that the Fed could still scale back the stimulus this year. He stated:
"If the data confirms our basic outlook, then we could move later this year.”
Where will mortgage rates head in 2014?
The Mortgage Bankers Association, Fannie Mae, Freddie Mac and the National Association of Realtors have each projected that the 30 year fixed rate mortgage will have interest rates in excess of 5% by this time next year. The average of their four projections is 5.3%. The table below shows the impact this will have on the monthly principal and interest payment on a $250,000 mortgage:
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Last week, Bernard Bernanke startled many by announcing that the Fed will not wind down their bond buying program right now. The program is part of an overall stimulus package geared at bringing back the national economy. The Fed’s purchase of these bonds over the last few years has driven mortgage rates to historic lows. The assumption that there would be a reduction in bond purchases has caused 30 year mortgage rates to spike upward over the last few months.
Surprisingly, Bernanke revealed the Fed will continue bond purchasers at the current pace. What happened and what does it mean to mortgage interest rates?
What would have happened if they reduced bond purchases?
According to Bankrate.com:
“The Fed could have caused rates to shoot up this week if it had announced the tapering of its bond-purchasing program.”
Why did the Fed decide not to start winding down bond purchases?
Moody’s Analytics reported that there were three reasons:
- Subpar economic data
- Tighter financial conditions
- Uncertainty surrounding fiscal policy
What does this mean to a buyer applying for a mortgage?
Those at Bankrate.com explain:
“For now, borrowers have dodged another spike in rates. The Fed’s announcement might even cause rates to drop in coming days, says Paul Edelstein, director of financial economics at IHS Global Insight.
‘Mortgage rates should fall back — not massively, but to some extent,’ he says.
That doesn’t mean homebuyers and homeowners should wait for lower rates, mortgage professionals say.
Eventually, once the Fed lets the mortgage market and the economy start walking on their own, rates will probably head back to the 5 percent or 6 percent range, says Scott Schang, manager for Broadview Mortgage Katella in Orange, Calif.”
When will the Fed begin winding down bond purchases?
According to an article in the Wall Street Journal:
“Federal Reserve policy makers decided this week that the economy isn’t in the right place for them to start winding down their bond-buying program. By the time they meet in December, it might be.
The decision to not start winding down the bond-buying program now was close… The economy only needs to get a little bit better over the next few months for the central bank to get its nerve back. That should be an easy bar for the economy to clear.”
Bernanke himself has not ruled out that the Fed could still scale back the stimulus this year. He stated:
“If the data confirms our basic outlook, then we could move later this year.”
Ed Conarchy, a mortgage planner at Cherry Creek Mortgage in Gurnee, IL had a great quote in the Bankrate article:
“Remember that rates go up like a rocket and fall like a feather.”
Still, Bankrate.com itself probably put it best: Grab the gift before it’s gone!
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WASHINGTON (AP) — Average U.S. rates on fixed mortgages held steady this week, hovering near two-year highs. But rates could change quickly next week when the Federal Reserve addresses its bond purchase program.
Mortgage buyer Freddie Mac said Thursday that the average rate on the 30-year loan was unchanged from last week at 4.57%, just below the two-year high of 4.58% reached Aug. 22.
The average on the 15-year fixed mortgage held at 3.59%. The two-year high of 3.60% was hit on Aug. 22.
Long-term mortgage rates have risen more than a full percentage point since May, when Chairman Ben Bernanke first signaled that the Fed could reduce its bond purchases this year. The purchases have been intended to keep long-term loan rates extremely low.
Most analysts expect the Fed to decide at its meeting next week to scale back its bond purchases.
Even with the recent gain, mortgage rates remain low by historical standards. But higher rates have spurred some homebuyers to close deals quickly and could slow the market's momentum if they continue to rise.
Mortgage rates have been rising because they tend to track the yield on the 10-year Treasury note. The yield has climbed 1.3 percentage points in the past four months as bond traders have anticipated that the Fed will slow its bond buying.
The 10-year note's rate was 2.92% on Wednesday, down from 2.97% Tuesday but up from 2.89% a week earlier.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country on Monday through Wednesday each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1% of the loan amount.
The average fee for a 30-year mortgage rose to 0.8 point from 0.7 point. The fee for a 15-year loan was steady at 0.7 point.
The average rate on a one-year adjustable-rate mortgage fell to 2.67% from 2.71%. The fee declined to 0.4 point from 0.5 point.
The average rate on a five-year adjustable mortgage dipped to 3.22% from 3.28%. The fee was unchanged at 0.5 point.
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This Week's Mortgage Rates Forecast
Risks Favor: FLOATING
Now that we are seeing a new trend in MBS performance, and technical signs point to short term interest rate stability, we can advise to float and see if we may experience some improvement. Be careful though, there is a lot of economic data being released this week that will cause daily volatility. So, let's recap: mortgage interest rates will probably end the week where they began them, meaning that rates are pretty stable. However, during the day, we may see volatility which means that rebate or loan pricing may be affected even though interest rates themselves remain unchanged. On a $200k loan, a difference of .5005 in loan pricing or rebate is $1,000 in out of pocket costs.
So for this week, any consumers who are less than 7 days out from closing may want to just lock in the great rates we see. Anyone more than that should watch the market with their mortgage loan originator and see if we may find even more improvement on the horizon.
BOTTOM LINE: Improvements in rate will come grudgingly, but if the stock market recovery we've been waiting for finally happens, we may improve by about .125%. Want more information about mortgage rates? Give us a call, Steve Hill and Sandra Brenner, Windermere Real Estate Seattle Northwest 206-769-9577.
Risks Favor: LOCKING
With the rocketing performance in the MBS (Mortgage Backed Securities) market, and the resulting improvement to rates, how can we possibly suggest to lock? Simple, it's because of those exact reasons. We have seen a sudden improvement in rates driven by economic data that was a surprise, as well as global news from Korea. We now find the market in a situation that is poised for a reversal. Just like a good gambler knows when to get up from the table, a smart consumer knows when it is a good time to take the deal that is on the table, and it appears that now is that time.
This week for any consumers who are less than 30 days from closing, you can float very cautiously because you have time to act and recover if we see a sudden reversal. However anyone that is closing within the next couple of weeks should really consider locking, because the chance of seeing this rate improvement slip away is higher than the chances of seeing continued improvement.
BOTTOM LINE: If you aren't closing for awhile, let's see what the market does and maybe we can see even a little bit more of an improvement. However, if you are closing within the next couple of weeks, or you simply like the rates you're looking at now, lock in these low rates and don't look back.
For more information regarding interest rates, give us a call, we have a couple of great lenders who can point you in the right direction.
Steve Hill and Sandra Brenner, Windermere Real Estate/FN Seattle – Northwest. 206-769-9577
Don't Obsess About Mortgage Rates
By Kirk Haverkamp
When most people start shopping for a mortgage, the first thing they do is look for the lowest interest rate they can find. And that can get them into trouble. A low interest rate can save you money, obviously. But it's only part of the story. If you're not careful, you could easily end up paying more in fees and other costs than you're saving with the interest rate itself.
Here's why. The interest rate is only part of what you pay for a mortgage. You also have to pay certain fees just for taking out the loan, which vary from lender to lender. A lender may charge higher fees to offset a lower interest rate, or may even pad a loan with "junk fees" to pad his or her profits. Because these fees are often rolled into the loan itself — that is, you borrow the money to pay them, along with the actual mortgage — it can be difficult to be sure just how much you'll end up paying versus another loan with a different interest rate and fee structure. Here's a closer look at some of the main reasons you don't want to get fixated on interest rates when shopping for a mortgage.
Discount points: These are the most common way of lowering a mortgage rate by charging higher fees. Each discount point is equal to 1 percent of the loan amount. For each point you pay upfront, you get the interest rate lowered by a certain amount, often one-eighth of a percentage point — for example, from 3.75 percent to 3.625 percent. On the one hand, discount points are a legitimate way of buying a lower interest rate by pre-paying a certain amount of interest up front. On the other, lenders sometimes use them to create artificially low rates, particularly for use in advertising, even if it's unlikely that a borrower would buy that many points in the first place.
Discount points can be a good deal if you're going to be in the home long enough for them to pay off. That is, long enough for your savings from the lower interest rate to exceed what you paid in points. But if you expect to move again or refinance the loan in a few years, they probably aren't worth it. Your best bet when shopping for a mortgage is to first get rate quotes without points when comparing offers from different lenders, then later inquire about adding discount points if you think you might be interested.
Fees: If you get a mortgage, you're going to have to pay origination fees. There's no way around it. Some mortgages may be advertised as "no fee," but what they're doing there is offsetting the cost of the fees by charging you a higher interest rate, which may or may not be a good deal. Lenders may also charge higher fees simply as a way of offering a lower interest rate. Though discount points are the most straightforward way of doing this, lenders may also simply charge more in origination fees as well. They may also charge certain fees that other lenders don't even charge. You may find that, even without points, there may be a difference of several thousand dollars in fees between what two lenders are charging for the same loan amount. Again, since these fees are either paid for separately upfront or may be rolled into the mortgage itself, it can be difficult to tell what's the best deal.
About APR: A better way of comparing mortgage offers is to look at the Annual Percentage Rate, or APR. It's a way of expressing the total cost of a mortgage in terms of an interest rate. By law, the APR must be featured in any mortgage advertisement that describes loan terms and in the paperwork a lender gives you when making a formal loan offer and at closing.
The way APR works is that it's basically the interest rate that would get you the same monthly payment on a loan with no fees as you'd pay on the same mortgage with the fees rolled into the loan amount. For example, let's say you're borrowing $200,000 at 3.5 percent on a 30-year mortgage with $6,000 in fees. Rolling the fees into the loan gives you a total of $206,000, which at 3.5 percent produces a monthly payment of $925 (not including taxes and homeowner's insurance) over 30 years.
To get that same monthly payment on a flat $200,000 without fees, you'd need an interest rate of 3.74 percent, which is your APR. In other words, the additional 0.24 percent represents the cost of your fees in terms of the loan.
Shortcomings of APR: APR is a helpful guide, but it's not perfect. For one thing, it's based on paying off the loan over the full term. If you refinance, sell the home or otherwise pay the loan off early, it changes the calculation. Remember, the less time you have the loan, the less benefit you get from a lower rate with higher fees.
APR also doesn't take into account the impacts of tax deductions for mortgage interest, which can lessen the bite of a higher interest rate and varies significantly from borrower to borrower.
To really assess the difference between two mortgage offers, you need to use a mortgage calculator. These are readily available online and allow you to see exactly how the costs and savings of different loan offers will play out over time.
For more information on mortagages rates, contact:
Steve Hill and Sandra Brenner
Windermere Real Estate Seattle – Northwest