Are Rates Going Up In 2013? Should You Care?
I don’t expect mortgage interest rates to increase much in 2013 but any increase at all can be costly to you if you are thinking of buying a home or refinancing an existing loan. Because interest rates have been low for so long, and the economy is in fact improving, I feel pretty confident in predicting that we could see rates increase at least .50% to 1% from the current averages. If that were the case then refinance applications will virtually disappear (and those borrowers currently represent 80% of the applications nationwide) and those wishing to buy a home will face higher payments.
2012 was remarkable in that it was the only year so far that saw the average benchmark for the 30 year rate stay under 4% for all 12 months. “The 30-year fixed-rate mortgage averaged 3.66 percent for 2012, the lowest annual average in at least 65 years”, said Frank Nothaft, chief economist at Freddie Mac. According to Freddie Mac’s chart of average interest rates (survey established in 1971) 3.35% in November 2011 is the lowest average for a 30 year fixed rate loan in a given month.
Rates have been exceptionally low because of the poor economy, and government intervention. In general mortgage interest rates will increase as the economy heats up and they will decrease in times of a poor economy. That is an overly simplistic explanation but it would not be possible in the space of this column to address all the variables impacting mortgage interest rates.
The amount of direct government intervention in the mortgage market since 2008 has been unique and has contributed to the rates being abnormally low. Absent this intervention the current rates would be higher than they are, even with the poor economy. The current stance of the Federal Reserve Chairman Ben Benanke is to keep rates low until the unemployment rate falls below 6.5% The unemployment rate is currently almost 8% and the Federal Reserve thinks we are three more years from reaching that level.
The Fed can only influence home loan rates, they don’t set them. Improving economies worldwide and any hint of inflation in the US (the result of an improving economy) will cause interest rates to increase. All the Fed can do is keep them lower than they would have been without the Fed’s intervention.
Have you ever wondered why the Fed doesn’t keep rates low all the time? Eventually low rates cause too much borrowing, spending, and growth. While that sounds like a good thing too much growth actually leads to price inflation and that’s bad. And if you are retired or nearing retirement the low rates are devastating. At the same time that this strategy keeps borrowing costs low it also means that banks are paying almost zero interest on savings accounts and CDs.
I do not think buying a home just because rates are low is a good idea. However, if you are within a year of buying you may want to consider accelerating your plans if possible. A $200,000 30 year fixed rate loan payment is $117 higher at 4.75% than it is at 3.75%. Since most families buy a home based upon the payment they can afford, the better way to look at this equation is that for the same payment you would have to decrease the price of the home you purchase by about $22,000 if rates move up 1%.
It is fascinating to me that we are discussing “higher” interest rates when during the first half of my career rates were in the 6% to 8% range. The first house Rebecca and I purchased in 1990 was financed at 10% and that was a “low” rate considering that rates had been in the teens in the late 1980’s.
Michael Mullin has 22 years’ experience in the lending industry. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to First Priority Financial. They are licensed to help families in the states of WA and CA, and offer FHA, VA, USDA, Conventional and Jumbo home loans. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to Mike Mullin