For several weeks, mortgage rates either equal or set new lows. However, in the last few weeks, interest rates have started to climb. Nevertheless, it is still too early to determine if the trend will continue for the immediate future.
For the week ending July 26 2012, Freddie Mac’s survey reported an average interest of 3.49% rate for a 30-year fixed-rate mortgages conforming loan. For the week ending August 16, Freddie reported an average interest rate of 3.62% for the same product. Conforming loans are mortgages that are equal or less than the limit set by Freddie Mac and Fannie Mae. The conforming loan limit ranges from $417,000 for a one-unit property to $801,950 for a four-unit dwelling.
Greg McBride, who serves as a senior financial analyst for Bankrates.com states, “The U.S. economy is not out of the woods, the European debt crisis has not been solved, we’ve got this looming fiscal cliff … there is no shortage of headwinds to the economy and there’s the possibility of more Fed stimulus.”
Recent Economic Data
One of the key reasons for interest rates making uninterrupted lows several weeks ago was the market’s anticipation of more action by the Federal Reserve Board to help the economy. However, improved economic data made it more ambiguous as to whether the Fed would take action.
The problem with the recent rash of good news about the economy lies in the difficulty in determining if data represents positive and sustainable improvement in the economy or a short-lived summertime tease. The Federal Reserve Board policy committee will have a chance to evaluate more data before meeting in mid-September and deciding on a course of action.
On Wednesday, Ben Bernanke, stated that the Fed would likely consider acting to support the weak economy. The stimulus could come in the form of purchasing mortgage-back securities (MBS) or Treasury bonds -- a process known as quantitative easing. The Fed has already invested more than $2 trillion in quantitative easing since 2009.
EU Debt Concerns
Other issues that cause low mortgage interest rates are concerns that the European government debt crisis could lead to trouble in the European banking industry. EU problems could have a negative effect on U.S. banks. In addition, the ongoing saga of the EU debt crisis have investors on the look-out for a safe vessel for placing their capital, which usually means money flowing into U.S. Treasury bonds-long consider the safest invest in the world.
Increase demand for bonds mean the yield, which is the interest rate paid to bond investors, will decline and so will mortgage interest rates. In the long run, it’s difficult to determine what will happen with interest rate. Numerous events can have a bearing on mortgage interest rates and keep rates from surpassing 4%.
Considerations When Refinancing or Buying
For homeowners thinking about refinancing in the near future, bear in mind that even with recent rate increases, borrowers can still refinance at unbelievably low rates. With homes values appreciating in many areas across the country, some homeowners may find that they have enough equity in their homes to make refinancing a smart move.
“The closer you get to 0%, the harder it is for rates to push lower. It doesn’t mean they can’t. But it’s like blackjack: The closer you get to 21, the harder it is for you to get a card that will help you,” says said Bob Walters, chief economist for Quicken Loans. Walter went on to say, “It’s also likely that when [rates] spring forward, they can do so with gusto.”
The current level of interest rates will not have a noticeable effect on the amount buyers can qualify for a loan. Compare to several years ago, most buyers can afford to buy a more expensive home, says Walter. Consider a 35% decrease in the value of a home that cost $400,000 several years ago. A decline in the interest rate from 6% to 4%, allows a homebuyer to purchase the same home and pay about 50% less in monthly mortgage payments, according to Walter’s calculations.