During its December meeting the Federal Open Market Committee (FOMC) of the Federal Reserve system decided to reduce its monthly purchases of Treasury bonds and mortgage-backed securities (MBS) by $10 billion per month. The new monthly purchase rate of $75 billion will be split between $40 billion in Treasury bonds and $35 billion in MBS.
The Federal Reserve designed its quantitative easing program (QE) to keep long-term interest rates and mortgage rates low as the economy recovers. So, what does the Federal Reserve's decision have to do with home loans and mortgage rates?
Mortgage Rates, Consumer Loan Rates Expected to Rise in 2014
Early reports suggest that economists expect consumer loan rates including auto loans and student loans to rise. Financing rates for big-ticket purchases (think home improvement financing) are also expected to rise, along with mortgage rates.
Lawrence Yun, chief economist for the National Association of REALTORS© said that although mortgage rates remain historically low, they could rise to five percent or higher in 2014. The Fed's bond purchases have boosted demand for securities, which typically supports securities prices and lowers mortgage rates. Reducing the volume of the Fed's monthly securities purchases is likely to cause mortgage rates to rise, particularly as tapering continues.
Mortgage Rates: Getting Your Best Deal
If you're planning to buy a home, there are a few things that can help you qualify for lower mortgage rates.
- Order your credit reports and scores. You are entitled to one free copy of your credit report from each of the three major credit reporting agencies annually; credit scores are also available for a modest cost.
- Review your credit reports closely and notify the credit bureaus of any errors on your credit reports.
- Check your credit scores. Mortgage lenders typically require credit scores of 720 or better to qualify for the lowest mortgage rates.
- Pay off consumer debt and/or increase your income to help raise your credit scores. The less consumer debt you're carrying, the better your chances for getting a great mortgage rate.
- Review mortgage quotes carefully. There's more to mortgage quotes than mortgage rates. Compare lender fees, discount points and estimated costs for appraisals title insurance, home warranties and inspections and closing fees.
- While it's easy to chase mortgage rates while you're looking for a home loan and a home, it's important to keep your finances and priorities in line. Getting pre-approved for a mortgage helps establish an affordable range of home prices before you start shopping for your next place.
Increase your chances for getting your best mortgage offer by ignoring those who say that " You have to buy a home now!" The only right time to buy is when you are financially prepared and want to buy. Mortgage lenders can work with changing interest rates and your circumstances to find a mortgage within your budget.
Wall Street and Main Street are likely to follow the Federal Reserve in 2014 as it makes further decisions concerning its QE program.