Nowadays, home mortgage rates are moving steadily lower.
The 30 year fixed mortgage rate is hovering near the 3.375% region and
it is expected to stay below 3.5% for a long period of time. Lenders are
also extending credit at reasonable rates, with most lenders charging
an interest rate of 3.5% and some at 3.25%.
Mortgage
rates are heavily influenced by the prevalent interest rate and the
10-year treasury auction is a good indicator of the performance of
interest rate. While mortgage rates are not directly based on Treasury
rates, the underlying securities (also known as mortgage backed
securities) tend to trade in the same direction as Treasuries. A big
move in the 10-year Treasury yield can result in huge volatility on the
mortgage rates.
Inflation
does have an impact on mortgage rates as well. It is an early indicator
of the behavior of mortgage rates. With increasing real estate values
and a period of very low inflation, interest rates have remained on an
all time low. Many economists feel that mortgage rates will remain
fairly low in the future because inflation rate is running extremely low
at the present moment.
Most
mortgage lenders offer a combination of interest rates and points, for
instance 6% and 2 points or 7% and no points. Points consist of a one
time upfront payment made to the lender at the time of the closing of
the mortgage. It is an additional fee on top of the mortgage payments
and it is not part of the down payment. A sharp reduction in mortgage
rates will result in a reduction in the cost of borrowing and an
increase in prices in markets where money is borrowed by most people to
purchase a home. In this scenario, the average payment will remain
constant.
During
periods of low mortgage rates, most homeowners opt for greater savings
via refinancing. Some of the benefits of refinancing at the right time
include lower interest rate, consolidation of the second mortgage loan,
lower loan terms, lower monthly payments and taking a substantial cash
out from equity. Borrowers who refinance also have the option of
reducing either their monthly payments or the length of the loan term.
It is not impossible to reduce mortgage terms from 25 years to 15 years
while maintaining the same monthly payments. In the event that mortgage rates move even lower, borrowers can take the opportunity to reduce it by another five years.
Taking
cash out from home equity to pay off credit card debt is another
benefit of low mortgage rates. Certain debt consolidation loans also
allow borrowers to reduce payment on home mortgage so that the money can
be channeled to repay credit card debts, which bear interest as high as
18 to 25%.
Many
lenders have come up with their own perspective for the direction of
mortgage rates. Mike Owens, a partner with Horizon Financial opines that
mortgage rates will continue to slide from its present territory of
3.375%. According to him, it is a good sign because the economy has
remained stable so far. Victor Burek of Open Mortgage notes that the
10-year Treasury rate will be kept under 1.87%. As long as the rate
stays below 1.87, he will continue to float and only lock in within a
few days of closing. On the other hand, Steve Chizmadia, a mortgage
consultant with American Capital Home Loans, feels that the treasury and
mortgage backed securities market have been very quiet for the past few
weeks. The energy that has built up over the last few weeks could
potentially lead to a strong movement in rates in either direction.
Julion Hebron, a branch manager at RPM Mortgage, has a different
opinion. From his point of view, a strong economy will keep the bid for
mortgage backed securities healthy and it is less likely for mortgage
rates to drop further from current levels.
Suffice
to say, even though mortgage rate is close to its all time low, it has
risen moderately and there is a greater risk of loss from the practice
of floating. Unexpected events can cause rates to move strongly in
either direction. Things to look out for this year would include
legislative actions in response to US debt ceiling and the Fed's outlook
regarding securities purchase.
Thursday, May 16, 2013
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