2014 Interest Rate Forecast


NEW YORK (MainStreet) — As interest rates continue to climb up slowly, consumers are facing more costs when they incur additional debt.

The Federal Reserve announced in December that it would start to purchase $10 billion less of bonds each month starting this January. The tapering of the Fed's quantitative easing program artificially suppressed interest rates.

Mortgage rates will start to "move higher in a slower, steadier fashion than 2013," said Bankrate.com senior financial analyst Greg McBride. The current rate for a 30-year fixed mortgage is 4.55%, according to Bankrate.com.

Mortgage rates are likely to move past the 5% mark during the first half of 2014 and could reach 5.5% in the second half of the year, he said.

"It was inevitable," he said. "This is going to be a year where mortgage rates increase, but at a modest pace."

Mortgage rates remain low compared to the last several decades. In the 1980s, mortgage rates reached the mid-teens, however the average rate over the past 30 years is 7.5%, said McBride.

Consumers who are planning to purchase homes should not let the slight increase prevent them from buying a house or condo.

"I wouldn't let the rise in mortgage rates deter you," he said. "We're still at very attractive levels. It is important to be on sound financial footing and have solid credit before you purchase a house."

The economy should continue to rebound steadily in 2014, said Tim Lucas, editor-in-chief of MyMortgageInsider.com. Mortgage rates have been artificially low because of the efforts of the Federal Reserve.

The average 30-year fixed mortgage rate could reach 5.25% by mid-2014 and closer to 5.5% by the end of the year, he said.

Even though mortgage rates will rise, investors are not likely to see many gains in CDs, savings accounts or money market accounts, said McBride. Some modest improvements may occur in longer maturities during the second half of the year.

"Those rates will remain in the basement throughout 2014," he said. "Consumers don't save for the prospect of fabulous returns, but for the flexibility when opportunities present themselves or to pay for expenses."

Issuers will continue to compete for high-quality consumers by offering low APRs and attractive 0% interest terms for as long as 18 months; however, rates on variable-rate credit cards will likely rise for consumers with marginal credit.

"The days are numbered for interest rates staying near zero," McBride said. "Eventually, those rates are going to march higher."

One good sign is that auto loan rates will likely remain low and close to the lows of 2013, he said.

"The financing is going to be really attractive for people who have been putting off car purchases," McBride said.

Investors face a challenging year as yields from the bond market will remain low and savings rates will be "anemic," said Jerry Webman, OppenheimerFunds chief economist.

"I can't hold out much hope for relief," he said. "I don't hold much hope that interest rates will increase. This is a tough environment for people looking for safety and income from the fixed income market. It is going to be a tough year."

Higher yielding, medium quality municipal bonds are underpriced currently and could be an attractive addition to an investor's portfolio, Webman said.

"It is better for investors to take a credit risk than to take an interest rate risk," he said.

Investors should be cautious about purchasing bonds or other products with longer maturities.

"Too many people have too much weight in them," Webman said. "Investors should emphasize shorter maturities and be cautious about how much they hold in longer maturities and what their exposure is."


Most people are still underinvested in equities and should look for companies who have a practice of increasing dividends, he said.

"Look for the stock market for dividend income because it has value," Webman said.

--Written by Ellen Chang for MainStreet

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