A closer look at the mortgage rate crystal ball

Posted on January 28th, 2010 in Real Estate News Bookmark and Share

We all keep hearing that mortgage rates are going to increase over and over, but they are still low. Are they really going to increase?

The answer is YES! Why?

The Fed has committed to purchasing mortgage bonds through March 31, 2010. They have already slowed their purchasing. It is estimated that the Fed is purchasing nearly 75% of the mortgage bonds. If they are not purchasing bonds, the rates will be higher even if other players step up their buying. There is not much hope of the Fed extending the mortgage bond purchasing program. They have specifically stated that they will not be extending the program.

With short term rates being so low (Fed Funds is at ¼%) it is easy for large institutions to borrow low and then invest in mortgage bonds and make money on the interest rate spread. If short term rates start to increase, this will diminish mortgage bond purchasing even further and push rates higher.

Forecasts show that the 30 year rate may be in the mid 6's by the end of 2010 with a volatile rate market throughout the year.

Here is an example of how a rate increase can change the cost of home ownership:

  • Loan amount of $240,000 and a purchase price of $300,000 with 20% down. The principal and interest payment at 5% is $1,288.37.
  • If the rate increases to 5.5% the same payment ($1288.37) would result in a loan amount of $226,910 or $13,000 less! With 20% down, this is a purchase price of $283,635.
  • If the rates increase to 6% the same payment ($1288.37) would result in a loan amount of $214,890 or $25,110 less. With 20% down, this is a purchase price of $268,612. (This is a purchase price drop of 10%!)

In summary, this means that it may be the perfect time to purchase the home you have been considering, or lower the price of your current listed property.

If you would like to receive a complimentary market study, please do not hesitate to contact your Prudential Steamboat Realty broker associate today at 970-879-8100 or via email at contact@prusteamboat.com.

Article submitted by:

Kathryn Pedersen
Yampa Valley Bank
970-875-1609
kpedersen@yampavalleybank.com