Freddie Mac reported last week that 30-year fixed mortgage interest rates fell to an average of 3.93 percent from the prior week’s 3.98 percent. While this was a respite -- something like a glass of iced tea on a summer afternoon -- from upward-bound mortgage rates, economists expected mortgage rates to rise after this week’s meeting of the Federal Reserve’s Federal Open Market Committee, or FOMC meeting. After Wednesday’s meeting, Fed Chairman Ben Bernanke indicated that the Fed may soon start a gradual rollback of its current policy of buying $85 billion of mortgage-backed securities (MBS) and Treasury securities monthly. The easing of quantitative easing could begin later this year, but the Fed is watching for two benchmark events to occur.
Mortgage Rates: Fed Benchmarks Aren’t Set in Stone
Benchmarks applicable to the Fed’s current quantitative easing (QE) policy include a 6.50 percent national unemployment rate and an inflation rate of 2.00 percent or less. Federal Reserve Chairman Bernanke noted that these benchmarks are not absolutes, but are viewed as indicators that the economy is recovering sufficiently for the Federal Reserve to begin reducing its QE role. The Fed says that it will consider ongoing financial and economic data as it determines actions appropriate for tapering off its monthly securities purchases.
So what does this have to do with mortgage rates?
Good question. While mortgage rates can change at more or less the drop of a hat, they are connected to the yield on 10-year Treasury notes. Yields on Treasury notes move the opposite direction as Treasury note prices; if the 10-year Treasury note price falls, its yield rises and mortgage rates also rise. When the Fed reduces its purchase of MBS and Treasury securities, demand and prices for these securities are expected to fall as securities become available for purchase. Consequently, their yields would be expected to rise along with mortgage rates.
Current Home Mortgage Rates: Historically, They Aren’t That High
Rising mortgage rates aren’t good news for home buyers and homeowners wanting to refinance, but Bloomberg reports that mortgage rates were 6.80 percent in 2006, and reached 10.00 percent in 1990. While shopping rates is important, here are steps that can also help mortgage borrowers find a deal on a home loan or mortgage refinancing:
- Order credit reports and scores: Consumers are entitled to one free copy of each of their credit reports annually. Credit scores are available for an additional charge. Check credit reports for accuracy. Knowing credit scores before shopping for a home loan helps mortgage loan officers provide more accurate quotes.
- Establish affordability: Request multiple home loan quotes. Using a mortgage affordability calculator helps with estimating how much buyers can borrow, and a price range for affordable homes.
- Make note of questions and ask them: Understanding loan options, how they work, and their features and benefits assists home buyers with selecting their best home loan.
Media reports and 30-year fixed mortgage rates alone shouldn’t influence a decision about buying a home. The best and only reason for buying a home is a buyer’s decision based on individual circumstances.