After the holiday season's frenzied pace and as we settle into 2011, I thought I would post some thoughts on interest rates. Many clients have voiced their belief that mortgage rates have shot up so significantly as to cloud prospects for future purchases or the benefit of a potential refinance. Although it is true that mortgage rates climbed significantly following the all-time record lows we saw in October and early November, 2010, they have since tempered a bit and we are currently in the range of the still historic lows that predominated most of last year.
Current rates are approximately ½ percent higher than the absolute lowest rates posted last year, when we saw 30-year mortgages up to the true conforming limit of $417,000 and the high balance conforming limit of $729,750 with "no points" rates of 4.0% and 4.375%, respectively. The rate differential results in increased monthly payments of $122 for the true conforming limit and $216 for the larger high balance conforming product. Although these payment increases might hurt a bit, today's rates should still be considered a gift and, over the course of 30 years, the difference in payments should feel increasingly insignificant.
Where are mortgage interest rates headed this year? The answer is really anybody's guess. Although it is safe to assume that the eventual trend will move upwards from today's historic lows, I've been in this business long enough to know that short-term interest rate prophecy is best digested with measured amusement from the sidelines. Remember the Quantitative Easing 2 (QE2) program that the Federal Reserve formally announced on November 3, 2010 as the latest major stimulus initiative? The stated goal of this program was to drive down long-term rates through the purchase of $600 billion of long-term treasuries. And the overwhelming consensus of "the experts" was that mortgage rates would drop further. The big surprise was that bond market yields increased on long-term notes and mortgage rates followed suit, increasing by ¾ to 1% over the course of just a few days. Another factor working against lower mortgage interest rates are numerous indicators that both unemployment figures and the general economy are improving.
Despite my conviction that there is no true method of soothsaying when it comes to predicting mortgage rates over the immediate future, I did set out to offer some insight and suppose that I must now go out on a limb. My first pearl of wisdom is that mortgage rates are still fantastically low and that we will still enjoy rates at the low end of the historic chart throughout 2011. There is no greater science backing this up other than the fact that the economy is sure to remain sluggish and rates could therefore only increase at a limited pace. The combination of greatly reduced home prices and low, long-term rates makes this a good year to buy, especially if planning to keep the home for a long time. If a refinance can reduce your payments and allow you to pay off sooner, then you should take advantage. My second pearl of wisdom is to lock-in whenever the rate meets your goals rather than gamble away a tangible benefit on the assumption (wish) of where rates will be another day. Finally, and drawing on rate movements of past years for guidance, I think we will see rates dip a bit in the coming months. Each year the excesses of the holiday season carry into the next, amid reports of decreased unemployment, improved industrial output, etc. As the hangover thins and clarity is regained, figures are generally reassessed with reduced exuberance. This should result in a dip in mortgage rates in late February/early March...at least that is my guess!