Mortgage Interest Rates Soon To Increase
Posted September 28th, 2009 in Mortgage Loan InsightsYou didn't really believe the government could keep rates low forever, did you? Most American homeowners don't know that it's only because the U.S. government has been purchasing mortgage backed securities that rates have been kept artificially low.
But don't expect this party to last much longer.
In a statement released last week by the Fed's Federal Open Market Committee, they stated that "in an effort to "provide support to mortgage lending and housing markets" they will "purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt." Additionally, "they expect to gradually slow the pace of these purchases in order to promote a smooth transition."
How does this impact mortgage rates? In short, they are going to go up. "It's simple supply and demand," says Scott Messina, publisher of Mortgage Market Live. "Just how fast remains to be seen, it really all depends on how fast the Fed turns off the spigot."
As part of the economic stimulation plan the Fed began purchasing the oversupply of debt this year. Without intervention rates would have been forced higher to attract more investors. Instead the Fed has been purchasing this oversupply and rates have benefited as a result.
Once the government gets out of the mortgage securities business — predicted to be sometime mid-2010 — you can expect interest rates to increase by as much as 1.00% for conventional conforming loans (those less than the conforming limit set annually). But the real hit is likely to occur in the super jumbo loan sector.
Super jumbo loans lost favor with Wall Street in August of 2007 and have sparsely recovered since. It's just not an area where many secondary investors dare to tread, and pricing has reflected this aversion.
The bottom line is this: if you have the means to purchase a home with long-term financing, DO IT NOW while rates are very, very low. If you have the equity to refinance a low-interest-rate adjustable loan that will reset in the next 12-36 months, DO IT NOW.
Otherwise expect very volatile activity in the markets heading towards the end of 2009 and into 2010. Trying to lock in a low rate becomes very difficult in such times, since rates can actually move several times in one day.
If the Fed's exit from purchasing loans isn't incentive enough, consider these other factors:
a) INFLATION. All this government printing of money in an effort to prop up an economy that needed to hit a natural bottom to institute a healthy recovery has resulted in a new multi-trillion-dollar deficit. Once there's sustainable recovery in the economy expect a hyper-inflationary economic condition, the likes of which we haven't seen since the Carter years. Mortgage rates will eventually hit double-digits, just like in the early '90s.
b) Increased Taxation: The Obama administration has made no bones about the fact that they think we ALL need to pay more in taxes, both overtly and secretly stashed away in more insidious plans. President Obama's healthcare proposal will bankrupt the American people even further. Watch your take home pay become less and less in the next 2 years. Add inflation and higher interest rates and you've got to ask yourself how you're going to pay for the extras in life, much less college for your kids and a contribution to your IRA for retirement. Social Security benefits? Gone so much sooner than we've been lead to believe. It's going to take a real reformation in the Presidency and Congress to undo the mess that's about to befall us all.
c) Rising home prices combined with rising interest rates. Think about that. There will be a demand for housing once the inventory of foreclosures, REOs, and short sales are back to normal again, but when the home that you can buy today for $300,000 at 5.00% for 30 years ends up costing $500,000 at 9.25%, you'll either have to make a 50% down payment or figure out another way to be able to afford to own a home.
It's important that we take stock of the true opportunity to lock in low interest rate, long-term loans while the opportunity exists. Tomorrow will NOT be a better day.
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