What in the world has happened to mortgage interest rates? This week already we have seen the lowest conventional rates crest at 4.7%. That is more than 1% higher than we were seeing earlier this month! It shoots a huge hole in home affordability with some conventional loans going up $300 per month overnight. That could slow down our frantic real estate market in Denver.
So, what has created this rise in the interest rates?
My friend and mortgage lender Jimmy Kinley explained it to me in simple terms. He works for PHH Home Morgage and can be reached on his cell phone at 720-261-1410. Here is what he told me about why rates are going up so fast. .
The magnitude of the rapid rise in mortgage rates has been shocking, but the reason is clear. To help stabilize financial markets and boost the economy during the financial crisis, the Federal Reserve Board initiated an unprecedented program (a few years ago) to purchase enormous quantities of Treasury Securities and Mortgage Backed Securities. The added demand from the Federal Reserve Board distorted Mortgage Backed Securities markets and pushed mortgage rates down to historically low levels. In recent years, analysts have attempted to estimate the impact of the Fed’s bond buying on Mortgage Backed Security prices, and some have said that mortgage rates would have been as much as 1.50% higher without the Fed purchases.
Now, the economy is no longer in recession. With steady economic growth, the Fed has indicated that it’s almost time to scale back (taper) its bond purchases. Investors are now trying to determine the “proper” level of mortgage rates in a growing economy in the absence of unnatural demand from the Fed.
Unfortunately, most investors would rather be safe than sorry, meaning that they would rather continue to sell Mortgage Backed Securities instead of guessing if mortgage rates have moved “high enough”. From one point of view, mortgage rates are still just back at levels last seen about two years ago when the economic outlook was much weaker.
In other words, there is a huge “sell off” in the mortgage backed securities world that is driving these indexes down and rates up. We have seen rates rise well over 1% in the last month, but the move since Bernanke spoke on Wednesday afternoon has never been seen before. It was over .5% higher in less than 3 business days.
This type of move in rates can easily be $150 a month on a 200K loan and $300 a month on a 400K loan. All that said, rates are still in the 4’s and that is relatively good compared to average rates over the last 10 years.
You may choose to wait for better rates. But, waiting has the risk of even higher rates. It might be better to hold your nose and lock a mortgage interest rate now before they go up again!