Blog Author's Note: This article does not necessarily reflect Keller Williams' or my own point of view. But Robert brings up some key points that I thought would be interesting for would-be buyers and homeowners looking to re-finance their mortgages.
How We See It
By Robert Weaver
Interest rates provide the key ingredient to the mortgage recipe. They determine the cost of your borrowing, how much you can borrow, and how much of your time will be consumed repaying what you borrow. Their importance cannot be overestimated and an explanation of such would fill volumes. The vital nature of interest rates in our economy begs the question: where are they heading?
We believe that interest rates will rise this year. How much is anyone’s guess but we would not be surprised if the rate on a 30-year mortgage went as high as 6.50%.
First, at the end of this month, The Federal Reserve Bank will cease purchasing mortgage-backed securities. By the time the end of the first quarter rolls around, the Fed will have purchased 1.25 trillion dollars in mortgage-backed securities. This has lent liquidity to the mortgage market and has lessened the pain felt by the real estate industry. Investors will have to fill the void left by the Fed beginning in April. We believe that to attract these investors investment banks will need to offer a higher return for what could surely be a risky investment.
Second, the economy as a whole will begin to heat-up. Legislative spending on the federal level will be somewhat stifled this year because of the political gridlock caused by the upcoming November elections. Less government is historically a good thing when it comes to growing a sound economy. Also, Americans are only going to put up with a recession for only so long before our “can do” attitude finds a way out of our shared misery. A growing economy always brings the pressure of inflation which, in turn, raises interest rates. The reasoning goes like this: the Fed will not want a sharp rise in the cost of goods and services (which inflation brings). Raising interest rates tends to lessen borrowing because it becomes more expensive to borrow.
Third, where can interest rates go? December, 2009 saw the lowest mortgage interest rates in history. Housing demand, especially in the low country, is beginning to heat-up and, as we know, an increase in demand tends to make interest rates rise. When one stops to consider that our current inflation rate is 2.63% and that 15-year mortgages are priced at around 4.375%, end investors are making an astounding 1.745% for their risk. This cannot and will not continue.
What does all this mean? It means that if you have not acted to refinance your home or purchase the home you have been dreaming about you need to act now. If you feel the rates are not low enough and could stand to lower even further then you stand a great chance of being left out in the rain. Aside from taking action, rising interest rates in this current economy is a good thing: maybe the American economy is going to rise off the canvas, dust itself off, and begin powering/leading the globe once again.
Robert Weaver is a mortgage loan officer with Brayden Capital Home Loans. He can be reached at email@example.com