Which way are the interest rates going?

Mortgage rates are tied to the price of MBS (Mortgage Backed Securities) and like other fixed income vehicles similar to U.S. treasuries, the higher the demand and price, the lower the corresponding rate or yield will be. Therein lies the issue to consider. Throughout 2009, the Federal Reserve was the primary buyer for MBS, purchasing as much as 80% or more of all MBS issued in any given month.

The concern is that when the Fed concludes their program of buying MBS’s, who will step in to pick up the supply of mortgages for the rest of 2010 and beyond. If investor interest is scarce, look for rates to rise. Also, filling the hole with avid buyers is not the only potential headwind facing MBS and other fixed income investments.

Think About it this Way
During the boom years of real estate, homeowners could just about set any price they wanted when the time came to sell their property. In many cases, simply putting a sign in the front yard would bring multiple offers, driving the price of the home up.

The Federal Reserve has acted in this capacity, supplying heated buying interest for the last fourteen months, in essence, setting the price of MBS and keeping interest rates low. When the Fed stops buying in April, the concern that exists isn’t so much that there won’t be buyers for home loans but what price those buyers will be willing to pay. The lower the price that new MBS buyers settle on, the higher the rates that consumers will have to pay.

Although, there is little Consensus Among Experts
Up until now, the predominant opinion of economists and financial pundits has been that interest rates will rise. The only disagreement has been to what degree and how quickly rates will do so.

On one extreme some expect rates could as much as two points before year end. On the other hand, some believe that rates may remain closely unchanged.

One More Thing to Consider
The purchasing of MBS by the Fed does not occur immediately after a loan closes. Several weeks must pass after the consumers close on their mortgages before they can actually be delivered, packaged and sold to investors like the Fed.

Because of this, many people anticipate that any potential move higher in rates may not occur until April 1st, after the conclusion of the Fed program.

Some say the rates have already started moving higher over the past few months, and will likely increase a bit more after the Fed stops buying, not just because the largest buyer is absent, but because speculators will be less confident and unload their positions ahead of the deadline. This gradual increase combined with what we’ve already seen will be meaningful, and as the year progresses, rates will oscillate higher still.

What Now?
If you are a candidate for refinancing your mortgage, call your mortgage professional today to lock in your best opportunity for a low rate. In addition to the potential for rates to rise, there are also other programs in place…that are scheduled to end in June…to assist people who otherwise could not refinance due to loan to value.

For prospective home buyers, any increase in interest rates erodes your purchasing power. In other words, a 1% increase in rate represents an approximate decline in purchasing power by 10%. For example, if rates increase by 1%, people who qualify for a $200,000 purchase price today may only qualify for a purchase price of $180,000 afterwards.

For those who qualify for the tax credit for first-time and repeat home buyers, another deadline also exists. The last day to obtain a contract to qualify is April 30th and closing must occur by the end of June. Miss either deadline and it could cost you up to $6,500 or $8,000, depending on eligibility.

No matter which way you look at it, waiting could cost you. Mortgage rates are still near the best levels we have ever seen. If you are in the position to move forward with obtaining a mortgage, the best decision would be to act sooner rather than later.

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