Mortgage Loans

Midnight has struck. The low-interest coach is turning back into a pumpkin. Borrowers who did not refinance or purchase a home by stroke of twelve have lost forever their opportunity to get a handsome prince of an interest rate.
At least, that’s the popular perception of what’s happening now that the Fed has officially concluded its purchases of mortgage-backed securities. With the Fed out of the picture, the thinking goes, rates must surely rise as far and as fast as they fell when the Fed announced it would buy $1.25 trillion in mortgage securities, sending mortgage rate plummeting to record lows.

No sign of sharp increase

Fortunately, that seems to be turning out to be a fairy tale. Although many experts began 2010 convinced that interest rates would rapidly rise by one-half to a full percentage point once the Fed quit buying securities at the end of March, there’s been no indication of that happening.

In fact, as the deadline approached, 30-year interest rates continued to fluctuate just below the 5 percent mark, as tracked by Freddie Mac, with no sign of moving upward. And analysts are now predicting a much smaller rate increase over the coming months, perhaps around a quarter of a percent.

What happened? For starters, the Fed has been gradually reducing its purchases of mortgage securities as the end of the program neared, rather than simply cutting things off after March 30. That lessened the shock that would have occurred if it had simply pulled out all at once.

Investors moving in to take up slack

For another, by buying up such a huge chunk of the mortgages issued over the past year, the Fed has not only driven interest rates downward, it’s also crowded out many of the private investors who were interested in mortgage securities. These investors are now starting to come back into the market, but the pent-up demand is helping to keep a lid on rates, at least for now.

What does this mean for borrowers? It means you should still be able to get an exceptionally good interest rate on a mortgage, either to purchase a home or refinance an existing loan, for some time to come. On a historical basis, anything below 5.5 percent for a 30-year loan is unusually good; rates below 5 percent, such as we’ve seen over most of the past year, are nearly unheard of.

From the perspective of Spring 2010, a rate of 5.25 percent come July might not sound that attractive, but three years down the road, it may turn out to be a screamingly good deal. And on home loans, it’s the long term that matters.

Great rates on 15-year loans

Another great opportunity that continues to present itself, particularly if you’re refinancing, is the rate on 15-year fixed rate mortgages. As of the end of March 2010, these were running about two-thirds of a percent below comparable 30-year rates – one of the biggest spreads on record. In other words, with the 30-year rate at 5 percent, depending on the survey used, 15-year rates were running around 4.33 percent.

This is an unusually rare bargain. As long as you can afford the higher payments on principal that come with a 15-year loan – perhaps you’ve already paid off 7-10 years on your current 30-year loan – refinancing at an ultra low 15-year rate may remain an exceptional opportunity well after the Fed withdraws its support for mortgage markets.