Q & A: Mortgage Rates and the Federal Reserve

Q: Last week I heard financial analysts on the news say that if the Federal Reserve Bank decides to "taper" its purchase of mortgage-backed securities and treasury bonds, then mortgage rates could rise. If this is true, should I put off buying a home for a while?

A: Let's start with the last part of your question first, as there is no tried and true method for forecasting future mortgage rates. The right time for buying a home is when you are financially prepared and want to buy. As for the Federal Reserve, commonly called the Fed, its chairman and the Federal Open Market Committee (FOMC), a group of Fed leaders, have indicated that the Fed will likely reduce its monthly purchases of mortgage-backed securities (MBS) and Treasury securities when the US economy has improved sufficiently.

Under a program called quantitative easing (QE) the Fed is currently purchasing $85 billion (yes, that's with a "b") a month of these securities in efforts to keep long-term interest rates low. If the Fed reduces its QE purchases, this would reduce demand for these securities and likely cause their prices to fall. When bond prices fall, mortgage rates typically rise. But nothing is set in cement.

While indications suggest that the economy is improving and that the Fed is likely to begin tapering its securities purchases before year-end, the FOMC and chairman Ben Bernanke have stated that the Fed will closely monitor economic conditions before revising the volume of QE securities purchases.

Instead of attempting to time the market, which very few do successfully, try saving money on your mortgage by getting the best rate you can. Mortgage rates can vary widely, so requesting several mortgage quotes from competing mortgage lenders is a great way to reduce your mortgage costs -- no matter when you buy your home.

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