Mortgage rates drift lower despite the Fed
A funny thing happened to mortgage rates this year.
They've gone down.
Every expert we spoke with in late 2013 said mortgage rates had nowhere to go but up in 2014.
We started the year with the average 30-year, fixed-rate mortgage — the most popular way to finance a home — costing 4.69%.
The consensus among economists and industry analysts was that it would rise to 5.5% by the end of the year.
So what happened? The average price of a 30-year, fixed-rate home loan fell to 4.43% by the first week in February and hasn't ventured higher than 4.54% since then.
Let's take a step back and acknowledge that that's almost a point more than those loans cost last spring — a painful fact that will cost consumers about $60 a month for every $100,000 they borrow.
But it could be worse. A lot worse. The spring home-buying season is upon us, and home loans are more affordable than anyone expected they would be. They're easier to get, too.
Even if the experts ultimately prove to be right and borrowing costs start climbing later in the year, mortgage rates will remain well below their historical average, so financing a house or condo will still be pretty cheap.
Since 1970, the average cost of a 30-year, fixed-rate mortgage has been about 8.8%.
And remember, those are all average costs. Savvy borrowers with decent credit can almost always pay a quarter to half point less than that to finance a home.
Spend a few minutes searching our extensive data base for the best current mortgage rates from dozens of lenders in your area. You'll see what we mean.
National Average Mortgage Rates
|Type of loan||Current average||Record-low average||Established|
|30-year fixed rate||4.54%||3.50%||Dec. 5, 2012|
|15-year fixed rate||3.58%||2.75%||May 1, 2013|
|30-year fixed jumbo||4.54%||3.93%||May 1, 2013|
|5/1 ARM||3.34%||2.63%||May 1, 2013|
Why did everyone think mortgage rates were going to go up this year?
The Federal Reserve is ending its campaign to drive long-term interest rates, including mortgage rates, to record lows.
The nation's bank-for-banks began buying $85 billion worth of debt a month in September 2012, a fairly even split between Treasury bills and bonds backed by thousands of home loans.
By flooding the mortgage market with money, it pushed mortgage rates to record lows in an attempt to boost real estate sales and property values.
In a process the Fed refers to as tapering, it reduced those purchases to $75 billion in January and $65 billion in February and March.
When the bank's rate-setting committee met today, it voted to lower the purchases to $55 billion in April.
At this rate, it appears the Fed's bond-buying campaign will wrap up sometime this fall — unless we're confronted with some new economic catastrophe.
Even if the Fed's retreat from the bond market ultimately pushes mortgage rates higher, Lawrence Yun, chief economist and vice president of research at the National Association of Realtors, says home buyers should keep things in perspective.
"People are used to seeing rates consistently at [less than] 5% in the past few years, but anything under 6% is still historically rare," Yun says. "It's still a great rate; people will just need to make the mental adjustment."
We were paying more than 6% during the early 2000s, 7% or 8% during most of the '90s and well over 10% during the '80s.
A 1% rise in rates is going to make a difference, but it shouldn't be a deal breaker for most buyers.
Let's say you were going to purchase a $250,000 home with 20% down.
With a 30-year, fixed-rate loan at 4.5%, you'd pay $1,013 in principle and interest per month. At 5.5%, your monthly principle and interest will be $1,135.
While $122 per month isn't pocket change, that alone shouldn't price you out of a good home.
Use our mortgage calculator to see what your payments would be for any fixed-rate loan.
Indeed, the Mortgage Bankers Association doesn't expect higher mortgage rates to put a damper on home sales.
In fact, it expects home sales to increase by more than 10% this year — counting new and existing properties — and the number of mortgages taken out to finance those purchases to be up more than 9%.
Refinancing is another matter.
Millions of homeowners leapt at cheaper mortgages when interest rates were falling. Many refinanced twice. Some replaced their loans three times.
That boom is over.
The Mortgage Bankers Association expects refinancings will fall by more than half this year.
Which raises the question: With so many homeowners already benefiting from the loan of a lifetime, who should be looking to refinance in 2014?
The answer: Borrowers who couldn't refinance over the past several years because they didn't have enough equity in their homes.
If rising property values have boosted your equity to the point where you can now refinance, rates are still low enough to make it worthwhile.
If you can lower your rate by a percentage point or more, you should at least sit down and run the numbers. Our refinance calculator can help you do that.
We also seem to be having an easier time qualifying for home loans.
The average FICO credit score for home buyers whose conventional loans closed in February fell to 755, according to Ellie Mae Inc., a California-based mortgage technology firm whose software is used by many lenders.
That's 11 points lower than in February 2013.
The average FICO score for homeowners who refinanced through a conventional loan was 730, down a whopping 30 points over the year.
FHA loans clearly helped borrowers with too much debt and lower credit scores, with the average FICO score for purchases dropping from an average of 700 in 2012 to just 686 in February.
It's also taking less time for loan applications to be processed and approved as well — an average of 41 days down from 50 days.
Those are exactly the kind of trends that help borrowers land the loans they need, and they're continuing into 2014.