At the beginning of May, the average 30-year fixed rate mortgage hovered around 3.35 percent. Since that time, mortgage interest rate has been trending up. For six-weeks straight, the long-term mortgage rate has climbed more than half a percentage point—hovering near 4 percent.
The climb in rates has made home buyers and refinance lenders a bit concern about the hike. Now that the Fed has concluded it monthly policy meeting, it finally made clear that the bond-buying program may be coming to a close if the economy continues its recovery. Consequently, the period of extremely low interest rates may be over as rates stay around 4 percent for the near future.
MortgageRefinance.com is predicting that today, Thursday June 20th Freddie Mac will report lower mortgage rates due to reduced demand for 4% loans. This will increase demand for mortgage refinance applications.
Just four weeks ago the benchmark rate stood at 3.71 percent. At this time last year, it was 3.91 percent.
Homeowners rush to refinance now
Many housing and mortgage industry experts predict that 4 percent will become the new standard. The fact is that even at 4 percent, mortgage interest rates and associated expenses are still at low levels. According to some local lenders and mortgage brokers, homeowners who have hesitated to refinance their mortgages are now beginning to sense of “urgency” as rate have touched the highest level in over a year.
The senior vice president of Boston Private Bank & Trust Co., Elizabeth Worrick said, “There’s definitely been a change in the last month in customer behavior.” According to Worrick, “There’s a little bit of frenzy on the refinancing side.”
Amy Tierce –a regional vice president Fairway Independent Mortgage in Needham—said that her institution receiving calls from homeowners who have mortgages in the 6 percent range. “And now this is a kick in the pants,” said Tierce. One rental property investor in South Boston still had and adjustable-rate mortgages a recently refinanced to a 30-year, fixed rate mortgage at an interest rate of 4.75 percent.
Factors driving interest rates
Economists attribute the increase in interest rates to two dynamics: 1) an improved economy. As investors gain confidence, they move their capital from safe, but low yield investments like U.S. Treasuries, into riskier investments, which earn a higher rate of return.
2) As demand for bonds decline, bond issuers pay a higher interest rate to attract more investors. Since early May, the rates on 10-year Treasuries have risen to 2.2 percent from 1.66 percent. Long-term interest rates, including home mortgages have a direct link to interest investors earn on Treasuries.
Fed poise to increase interest rates
The Chairman of the Federal Reserve made it clear that they would do whatever is needed to help the recovery. If economic data continue to show the economy improving they may scale-down the $85 billion a month bond buying program.
The program pumped money into a stagnant economy and help keep interest rates at historic levels—to encourage home ownership, mortgage refinancing and business investments. A reduction in the program will put pressure on long-term rates to rise.
Bernanke said that a pull-back in the program may happen this year. The program may end in mid-2014. The Feb believes that it is on target to reach its objective of an unemployment rate—currently at 7.6 percent, of 6.5 percent early next year. The goal is to cap the inflation rate at 2 percent.
Refinancing and mortgage applications
The Mortgage Bankers Association (MBA) reports that refinance applications accounted for 69 percent of all mortgage applications last week. During the first quarter of 2013, refinancing applications averaged 74 percent of all mortgage activity. MBA’ s vice president of research and economics Mike Frantantoni, vice president of research and economics said, “Interest rates are the number one driver of refinances, so as rates continue to climb, there will be less incentive for homeowners to refinance.”
As the economy improves, wage and salaries increase and consumer confidence rise, Frantantoni believes that the home buying segment will pick up to offset the decrease in mortgage refinancing.
Homeowners who plan to refinance may have seen the end of super-low rates and refinance now.