Mortgage Rates To Rise, But When And By How Much?

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Mortgage Rates To Rise, But When And By How Much?

Since the financial crisis ended in 2008, mortgage rates have been at historically low levels; nonetheless, it is widely believed that they will eventually increase; the question is by how much and when.

For the most of 2014, the typical rate for a 30-year fixed-rate mortgage varied between slightly over 4% and 4.5%. In late 2015, according to the Federal Home Loan Mortgage Corp., or Freddie Mac as it is more popularly known, rates would increase to 5%. (See How To Shop For Mortgage Rates for additional information.)

Several aspects of the economy, the debt markets, and Federal Reserve policies influence mortgage rates.

Link To Treasury Bonds

Treasury bond rates influence the interest rates on fixed-rate mortgages. The United States Treasury Department issues bonds to pay off debt.

For instance, the yield on 10-year Treasury notes is often correlated with the rate on 30-year fixed-rate mortgages. The rate of return is represented as a percentage and is called the yield. Interest rates fluctuate along with the yield.

In contrast, the interest rates for adjustable rate mortgages (ARMs) are determined by the Federal funds rate. This is the overnight lending rate between depository institutions and banks using cash held at the Federal Reserve. (For further information, see: Fixed-rate vs. Adjustable-rate Mortgages.)

The Federal Reserve maintains interest rates low during economic downturns to promote borrowing and boost consumer spending. This is why rates have stayed at record lows after the collapse of the financial and housing markets.

Quantitative Easing To End Soon

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After the markets crashed, the Federal Reserve took an uncommon step and launched a quantitative easing (QE) program in late 2008. It started purchasing US Treasury bonds and mortgage-backed securities in a bid to stimulate the economy and housing markets, which helped bring down mortgage rates. (For further information, see: Does Quantitative Easing Work?)

Since the program’s inception, the Fed has purchased more than $4 trillion in Treasury bonds and mortgage-backed securities.

Following the tapering down of the Federal Reserve’s quantitative easing bond-buying program, interest rates are anticipated to increase. According to the Fed, it will probably come to an end in October.

Strengthening Economy

A improving economy is one of the other elements influencing the predicted rate hike. According to Freddie Mac, the average rate of economic growth in 2015 is predicted to be 3.3%. The unemployment rate is likewise declining and is anticipated to do so further. Keep in mind that when the economy is having trouble, interest rates are maintained low to encourage expansion. What The Unemployment Rate Doesn’t Tell Us has additional information.

One anticipated a quicker increase in mortgage rates. However, Janet Yellen, the chairwoman of the Federal Reserve, is balancing rates rather than rising them too soon to avoid hurting a still fragile economy and housing market.

The Bottom Line

Expect interest rates will increase in the second half of 2015, barring another collapse of the financial and housing markets and if the economy keeps growing. In comparison to historical norms, if they do go to the 5% level, it will be a minor increase. Rates will still be far lower than the average of 8.5% that 30-year fixed-rate mortgages have seen since Freddie Mac began keeping track of them in 1971. In the years before the recession, rates were on average 6%. (For further information, read An Overview of Mortgage Basics.)

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