Both home prices and mortgage loan interest rates are at the lowest they’ve been in a long while. Even so, the number of home sales is declining and many are wondering if the housing market will ever recover while interest rates are depressed.
For those who already own homes but would like to lower mortgage payments, many aren’t sure whether to refinance now before interest rates jump back up or if this current trend will lead to even lower mortgage rates later. One thing is for certain, however–the Fed can’t keep rates down forever and it’s inevitable they increase sooner or later.
Why Mortgage Rates Fluctuate
Mortgage rates are largely determinant upon mortgage-backed securities, which are a type of bond. The level of demand for bonds versus stocks affect their prices and when bond prices are high, rates are low. The opposite is also true.
This is because when demand for bonds is high, investors place their funds into them. However, when the stock market is a more attractive investment option, bonds lose those investor dollars. In order to entice investors to keep buying mortgage-backed bonds when demand is low, they must offer an attractive return. A higher return on these bonds means higher interest rates on the mortgages that fund them. So, when the bond market is strong, lenders can afford to keep interest rates low.
Lately, however, the biggest investor in mortgage-backed securities has been our own government. The Federal Reserve has contributed over a trillion dollars into mortgage-backed securities in order to maintain control over mortgage rates.
Historically Low Interest Rates
The average rate for 30-year fixed loans had dropped to 4.69 percent near the end of June, which is the lowest rate Fannie Mae has recorded since 1971. If you’re curious as to what a 4.69 percent rate might look like compared to your own, check out your mortgage rate using a mortgage calculator. However, whether these incredibly low rates will breathe life into housing sales is still uncertain.
The reason mortgage rates have stayed so low for so long is the Fed’s purchases of mortgage-backed securities, which totaled $1.25 trillion as of March 31, 2010, the New York Times reports. The goal has been to fund the housing market and keep rates low, hopefully allowing the housing market to improve so overall economic recovery can continue.
Will the Fed Raise Rates?
As far as the Fed raising interest rates again, it seems it won’t happen anytime soon. When Federal Reserve policymakers met in June, they cited “Europe’s debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment” all as reasons they will likely leave benchmark bank lending rates at record lows.
But rates can’t remain at floor level forever. At some point, the Fed will have to loosen the reins a bit and allow them to go up again, which begs the question whether mortgage holders with big monthly payments should refinance now before rates rise or hold out for possibly lower rates down the road.
Refinance Now or Later
The Fed has been gradually pulling out of mortgage-backed securities and allowing the spread to move a little. Even so, the Wall Street Journal’s Market Watch reports “Investors and analysts at RBS Securities, National Penn Investors Trust, DWS Investments and others expect rates will rise only between 0.1% and 0.25% over the next several months.”
This means that while home loan rates will likely not rise sharply in the near future, they can’t really get much lower. Anyone interested should take advantage and research on how to find home mortgage refinancing soon or miss out on low rates completely.