Mortgage rates fall as Fed delays changes
Home loans cost more than they did last fall, but not as much as they did last summer.
What's behind all of the ups and downs we're seeing in mortgage rates?
The Federal Reserve, of course.
Last fall, the government-controlled bank that manages the country's monetary policy launched a new effort to boost the economy by driving down long-term interest rates.
Mortgage costs fell to record lows last winter and spring.
When the Fed indicated that it would begin phasing out that campaign this fall, the party seemed to be over.
Mortgages cost a percentage point more by the end of last summer.
Then the government shutdown and disappointing jobs reports came along, and now it appears the Fed will continue to hold down long-term interest rates until early 2014 — maybe longer.
Mortgage costs sagged again, with the average price of a 30-year, fixed-rate loan dropping from a two-year high of 4.74% in mid-August to 4.27% in this week's survey of major lenders.
National Average Mortgage Rates
|Type of loan||Current average||Record-low average||Established|
|30-year fixed rate||4.27%||3.50%||Dec. 5, 2012|
|15-year fixed rate||3.38%||2.75%||May 1, 2013|
|30-year fixed jumbo||4.35%||3.93%||May 1, 2013|
|5/1 ARM||3.26%||2.63%||May 1, 2013|
How has this influenced monthly payments?
The principal and interest for a 30-year, fixed-rate loan at 4.42% is $493 per month for every $100,000 borrowed.
That's $43 a month more than you would have paid if you'd financed a home in early May, when the average rate was just 3.52%, but $28 a month less than if you'd taken out a loan when rates peaked in summer.
Use our mortgage calculator to see what your monthly principal and interest payments would be on any loan.
Of course, savvy borrowers with decent credit can always expect to pay a quarter to half point less than the typical cost of any home loan.
Search our extensive database of the current interest rates offered by hundreds of lenders for better-than-average deals.
It's also important to note that borrowers seem to be having an easier time qualifying for home loans this autumn.
The average FICO credit score for home buyers whose conventional loans closed in September fell to 732, according to Ellie Mae Inc., a California-based mortgage technology firm whose software is used by many lenders.
That's 18 points lower than in September 2012.
The average FICO score for homeowners who refinanced through a conventional loan was 735, down a whopping 32 points from last year.
Where do we go from here?
It all depends on how the Fed unwinds its aggressive policy to push long-term borrowing costs down and spur our lethargic economy to grow faster and create more jobs.
In September 2012, the bank began buying about $85 billion a month in long-term debt — $45 billion in Treasury bonds and notes, and $40 billion worth of mortgages.
When the Fed buys bonds backed by thousands of home loans, it essentially floods the market with money, pushing down the cost of financing a home.
But the Fed has now purchased more than $3 trillion worth of government and government-backed mortgage debt since the financial crisis hit in 2008 — and that's a lot, even in the mega-banking world it inhabits.
Early this year, the Fed's rate-setting committee began debating when to end those purchases, with some members pushing to cut back this summer and others urging the Fed to stay the course at least until fall.
Bernanke shook the financial industry in late May when he told a congressional committee that, "We could in the next few meetings take a step down in our pace of purchases."
Bernanke laid out an even clearer road map after the Open Markets Committee meeting in June, announcing that the Fed would begin to scale back or "taper" its bond purchases later this year and end them altogether when the unemployment rate hits 7%.
That sent mortgage rates up to levels we hadn't seen since July 2011.
So imagine the shock when Bernanke changed his tune after the Fed meeting on Sept. 18, saying that the central bank would maintain its bond-buying program for the foreseeable future.
Now it looks like it could by January before any decision to cut back on the program is made.
Chicago Fed President Charles Evans recently said that the Fed needs more information on how the government shutdown affected the economy before making any decisions about bond purchases, which could take "a couple of meetings."
The first of those meetings was on Oct. 30, and the Open Markets Committee made no move to scale back its bond purchases.
Since most economists think the committee is unlikely to act at its last scheduled meeting of the year on Dec. 17, it seems any tapering could be pushed back into January.
The likelihood of the Fed taking a powder until '14 grew this week when the Labor Department said employers added a disappointing 148,000 jobs in September.
While the unemployment rate dipped to 7.2% the economy probably needs to be creating more like 200,000 jobs a month for the Fed to think it's growing at a reasonable, sustainable rate.
If the Fed does stay the course for the remainder of the year, borrowers could see stable — or even slightly lower — mortgage rates.
We probably won't fall all the way back to the record-low mortgage rates we saw last winter, but the holidays might find rates closer to 4% than they are right now.
That's better than anyone financing a home could have hoped for a few months ago.