Low Mortgage Rates May Have A Limited Shelf Life

Mortgage rates ticked upward in the first week of June, but are still more than 30 basis points lower than they were at the end of 2013. Anyone looking to take advantage of low rates should act quickly though, because there are multiple signs that this opportunity could be short lived.

Recent Mortgage Rate Changes

Prior to rising by two basis points in early June, 30-year fixed mortgage rates had fallen for five consecutive weeks. Those rates are now at 4.14 percent, according to mortgage finance company Freddie Mac.When the year began, rates were 4.48 percent, so after rising last year, home loan rates have been on a downward track so far in 2014.

Lower home loan rates reduce the cost of buying a home, and also represent an opportunity for some home owners to save money by refinancing, or to gain access to cost-effective home equity loans. The question is, should consumers act now, or hold out to see if rates fall even further? While the future course of interest rates is never certain, there are reasons to believe that rates are more likely to head higher than lower going forward.

Looking Ahead

Here are three reasons to suspect that higher home loan rates may be in our future:

  1. The economy seems to be bouncing back. Low interest rates are often a product of a weak economy, and real GDP growth turned negative in the first quarter of 2014, according to the Bureau of Economic Analysis. However, employment figures from the Bureau of Labor Statistics (BLS) show that job creation has now topped 200,000 for four consecutive months, after having slumped badly in December and January. Stronger growth could send home loan rates back upward.
  2. Inflation may be gathering steam. The BLS reports that the inflation rate increased in each of the last two months. Inflation is still relatively low, but with 30-year rates barely above 4 percent there is not much margin for higher inflation. Lenders do not want to get stuck making loans at less than the rate of inflation.
  3. Treasury bond yields have turned upward recently. Federal Reserve figures show that after having fallen in each of the first five months of the year, 30-year Treasury bond yields jumped by ten basis points in the first week of June. Why is that significant to home loan rates? Treasury bonds represent long-term interest rate commitments, so they are sensitive to many of the same economic influences as mortgage rates. However, since Treasuries are traded daily, they often reflect changing conditions more quickly than mortgage rates. Like mortgage rates, Treasury yields fell in response to economic weakness early this year, but more recently Treasury yields have headed back upward. This may be in response to signs of economic strength, rising inflation, or both.

Beyond what is happening with broad interest rate trends, you should always compare specific mortgage quotes to get the best rate. This is especially true in a dynamic market where rates are changing quickly, because different mortgage lenders will react those changes to different degrees.

As for timing, you should never rush an important financial decision like buying a home, refinancing a mortgage, or taking out a home equity loan. However, you should not delay unnecessarily either, because low mortgage rates may not wait around for you.

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