Mortgage rates should remain near record lows in 2013

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If you plan to buy a home or refinance your mortgage in 2013, you should be able to take advantage of historically low home loan rates throughout the year.

Economists' opinions vary, with some predicting record-low rates will continue for the foreseeable future and others seeing a gradual increase to as much as 4.5% by the end of 2013. That's about a percentage point on average more than you'd pay today.

"I think rates are as low as they're going to get, and we expect them to start rising in the second half of 2013 as the economic outlook improves," says Celia Chen, senior director for Moody's Analytics.

For an indicator of things to come, look toward the Federal Reserve, which recently said it would continue open-ended plans to buy billions of dollars in both long-term Treasury bonds and mortgage-backed securities each month to "maintain downward pressure on longer-term interest rates."

Since mortgage rates follow long-term Treasury rates up and down, the Fed's action should help keep mortgage rates relatively low for some time.

Chen believes mortgage rates will rise very slowly over the next few years, hitting 6% sometime in 2016.

Still, predicting where rates will move is a tricky business.

Many experts forecast rates would remain near 4% in 2012. Instead, they have fallen throughout much of the year.

chart showing 2012 mortgage rates

And 2013?

The Mortgage Bankers Association says rates will hit 4.5% by the end of the year, while Gus Fauchier, senior economist with PNC Financial, believes the Fed's continued aggressive actions will keep rates unchanged.

"I expect them to remain below 3.5% for most of 2013. I really don't think we'll see that change until 2014 if we see consistent job growth and the Fed making changes to that accommodation," Fauchier says.

Could they fall further still?

Economists have their doubts, since they believe rates already should be lower, given their historical relationship with Treasury yields.

"Rates probably never fell as much as they should have, given how low the 10-year Treasury is," Chen says.

"I don't think (lenders) have an incentive to lower rates, because they can't keep up with business they have."

Even if rates increase and they finish the year as high as 4.5%, they'll still be at historic lows.

The historic average of a 30-year home loan rate since 1970 is 8.8%. That puts the current rates at less than 50% of their historic average.

Exceptionally low mortgage rates and still-depressed housing prices mean buying a house in 2013 will remain a cheap proposition.

How Rates Impact the Cost of a $250,000 Home

Interest rate Monthly payment
3.5% $898
3.75% $926
4% $954
4.5% $1,013
Note: Assumes a 20% down payment.

Even if rates spike to 4.5% as in the example above, you'd pay an extra $115 per month.

You have to remember, five years ago that $250,000 home might have sold for $300,000. And you would have paid an interest rate of 6% on the mortgage.

Again, assuming a 20% down payment, your monthly payment would have been $1,438.

Use our mortgage calculator to see what your payments would be for any fixed-rate loan.

Keep in mind, lending qualifications are considerably stricter than they were back in the pre-housing bubble days.

That's a good thing, because that irresponsible lending contributed to the housing crash in the first place.

Lenders can vary dramatically on their minimum requirements, but a monthly report that tracks about 20% of all U.S. mortgage originations gives good insight.

November Mortgage Data

Purpose of Loan Percentage
Refinance 68%
Purchase 32%
Type of Loan Percentage
FHA 19%
Conventional 73%
Time to close Days
Refinance 51
Purchase 48
Closed loans FICO score
FHA purchase 698
Conventional purchase 764
Denied loans FICO score
FHA purchase 670
Conventional purchase 736
Source: Ellie Mae Origination Insight Report, November 2012

A recent report from Ellie Mae Inc., a California-based mortgage technology firm whose software is used by many lenders, found the average FICO credit score for home buyers whose conventional loans closed in November was 764. Of denied applications, the average FICO score was 736.

Average FICO scores for approved loans were roughly the same a year ago, but the average score on a denied loan was eight points lower in 2011.

The report also found that the average person approved for a conventional loan was financing an average of 79% of the home's value.

All of these numbers mean that if you want to buy a home, you better come with a 20% down payment and have good to excellent credit.

If you can't meet these requirements, you may be able to turn to an FHA loan.

The FHA requires a minimum FICO score of 580 and a 3.5% down payment on most mortgages it backs.

But this is basically irrelevant, because lenders don't need to offer FHA loans and can impose stronger requirements.

The FHA doesn't make the loan; it just guarantees repayment to the lender.

For all home loans, you'll need to show two years of steady employment, and you should be prepared to document every aspect of your finances, including debt, income and assets.

If you already own a home and are considering refinancing, 2013 could be the last year to get a rate below 4%.

Whether you should refinance or not depends on a number of factors. But if you can lower your rate by a percentage point or more, you should at least sit down and run the numbers.

For a straight refinance (meaning no cash out), you'll need at least 20% equity in your home (though some might allow 10%), a good credit score and the same documentation of income you'd need for a loan if you were buying.

You could save even more in interest (although your monthly payment would increase) if you refinance into a shorter-term mortgage.

Our refinance calculator will show you how much you can save by refinancing.

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