Record-low mortgage rates storm into late winter
It remains a cool time for mortgage rates.
You can grab an average 30-year, fixed-rate home loan for about 4%. These record-setting interest rates are about a percentage point cheaper than this time last year.
But if the economy improves before you act, you might miss out.
"If there is a fix to the EU debt crisis and our economy heats up, rates can go up fast," says Greg Meyer, community relations manager with Meriwest Credit Union in San Jose, Calif. "I have seen it repeatedly since 1978. Each time a recession has ended, lending rates went up quickly."
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In most big cities, lenders are offering 30-year loans for as little as 3.625% with no points and application fees of less than $2,000.
Principal and interest payments would be $456 a month for every $100,000 borrowed.
Use our mortgage calculator to see what your payments would be for any fixed-rate loan.
With interest rates this cheap, we know these deals can't last forever.
So, when will the party end?
It's hard to predict when rates will increase, but many economists and market watchers see nothing imminent.
There are three indicators that will signal a shift:
Signal 1. Rates could increase if the Federal Reserve changes course.
The Federal Reserve has taken steps to keep interest rates low.
Its rate-setting committee last month said it planned to keep short-term interest rates near zero until at least the end of 2014. And the Fed has been buying long-term government debt to help push down interest rates -- like those applied to mortgages.
But can borrowers expect this to keep working?
"Nobody gets reelected by raising interest rates in a down economy," says Todd Tramonte, broker-owner of Market Experts Realty in Richardson, Texas.
Signal 2. The Fed will only change course if inflation becomes a problem.
Besides politics, there's another guide you can use to predict where interest rates are headed and when: the economy.
"Consumers can likely expect rates to remain low for a couple more years, but there are other events that could affect the rates," says Steven A. Wolf, a certified public accountant and executive director of Capstone Advisory Group in Washington, D.C.
It’s these other events you should think about if you’re shopping for a loan.
The Fed has an indirect influence on home loan rates and economic activity, because the rate at which it lends money influences the rate at which banks lend money.
When interest rates are low, people are more inclined to borrow money, because it is less expensive to do so. A prolonged period of low interest rates can contribute to inflation, however.
Over the last 20 years, U.S. inflation rates have ranged from 1.6% to 3.3% per year, but we’ve experienced rates as low as -0.7% and as high as 13.3%.
Inflation today is at 2.9%.
If the Fed starts to see too much inflation, it will increase interest rates to slow things down.
And if lenders expect inflation, they’ll charge higher home loan rates to protect their profits.
Signal 3. Rates will increase along with U.S. Treasury yields.
For lenders to have money available to offer, they need investors who want to buy securities based on those loans.
Investors will only want to buy those securities if the interest rate is high enough to compensate them for the risk that borrowers will default. The U.S. Treasury rate is considered risk-free, so interest rates must be higher than that.
Treasuries come in a variety of maturities, but they typically use 10-year U.S. Treasury rates as the risk-free rate when considering an investment in mortgage securities backed by 30-year, fixed-rate home loans.
Why 10-year and not 30-year securities?
Because most homeowners sell or refinance within five to 10 years of taking out a loan.
The yield (or interest rate) on 10-year Treasuries has hovered near 2% so far this year.
If you see 10-year Treasury yields increase, you can expect mortgage rates to follow suit.
Should you keep a close eye on these economic factors to try to get your home loan at the best possible time -- when rates are at their lowest?
It’s not a good idea.
It’s a form of market timing, and as with stocks, trying to time the market has just as good a chance of working against you as working for you.
Your best bet is to try to secure a reasonably good rate that you can afford from a lender who charges reasonable fees when the time is right for you.