Why Mortgage Rates Won't Rise


If you go way, way back in time, to the start of the year, you’ll find many experts forecasting increased mortgage rates for 2010. Now, with the spring home-selling season upon us, a home shopper might feel the need to hurry, else higher rates make a home more expensive.

Well, you can relax. Things have changed and lots of experts now think rates will hold steady through the spring, and perhaps for a good deal longer.

Today’s 30-year fixed-rate mortgage is a terrific deal, charging an average of 5.14%, according to the BankingMyWay.com survey. The 15-year fixed loan averages just 4.496%, also a great deal. Adjustable-rate loans are the only fly in the ointment. The one-year ARM, charging 4.707%, doesn’t offer enough up-front savings to offset the risk of higher rates later.

Late last year, experts thought a growing risk of inflation from economic recovery would lead the Federal Reserve to begin raising short-term rates, if not in March perhaps in summer or fall. But on Tuesday, the Fed indicated it will keep rates low for some time. While the economy is improving, it’s sluggish enough to need continuing stimulation, and inflation doesn’t look like much of a threat.

Also, the Fed was expected to end a program of buying up mortgage-backed securities that was credited with helping to keep interest rates low. That trillion-dollar effort is indeed ending, but HSH Associates Financial Publishers, a mortgage-tracking firm, says the market will get the same rate-dampening effect from new, looser rules allowing Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) to increase the amount of losses they incur.

As HSH sees it, “this new arrangement means that Fannie and Freddie can accumulate loans or securities on their books without needing to dump them into the market all at once; instead, they can mete out supply to the market, providing a stabilizing effect on interest rates."

All of this is good news for mortgage shoppers. The housing market, however, still presents plenty of risks. Many homes look like bargains, with prices still 20% or more below levels of a few years ago. But unemployment is high and millions of homes are in foreclosure or worth less than their owners owe.

That could cause home prices to dip again, lengthening the time it takes for a property’s value to grow enough to offset the fees, sales commission and other expenses a homeowner incurs with a purchase and subsequent sale. Historically, it takes three or four years to break even on a home purchase. Prudent home buyers might be better off assuming seven or eight years in this market.

If mortgage rates are to stay low for the rest of the year, as some experts now expect, there’s no hurry. It seems unlikely home prices will spike. You can take your time shopping for a home, and buy only when you find one that will suit you for the long term.

Use the shopping tool to find a good mortgage deal, and the Maximum Mortgage and Mortgage Loan calculators to figure how much you could borrow and figure monthly payments.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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