Current Mortgage Rate Changes Cue Forecasts: Small and Slow

Posted by  on Oct 08, 2010

Today's mortgage rates still below five percent

Freddie Mac's weekly survey of current mortgage rates, published Thursday, shows that the average rate for a 30-year, fixed-rate mortgage (FRM) remains below five percent, at 4.96 percent. That's 0.01 percent above last week, and 0.02 percent below the same week last year.

If you think those figures suggest stagnating rates, you're right. Of course there have been somewhat wider variations in the spread over the past 12 months, but overall movement has been minimal.

Current mortgage rates unlikely to change?

Now, two recent reports suggest that any rise in mortgage loan rates may be smaller and slower than previously thought.

A few months ago, the Mortgage Bankers Association (MBA) was predicting that the 30-year FRM average rate would be six percent by the end of the year. But its latest forecast, published last week, now forecasts that it will be 5.8 percent. And it anticipates that that rate will drift up only gently, on a nearly straight line, to 6.6 percent in the fourth quarter of 2012. Fannie Mae's figures suggest a similar, slow drift upward.

How does this affect me?

Refinancing decisions are more sensitive to rate changes than new home purchases. After all, deciding whether to seek refinancing begins with a simple question: Will your savings from lower mortgage refinance rates pay for the cost to refinance? As rates rise, the answer to that question is increasingly likely to be negative. So, if you're thinking of refinancing, you should probably act now.

You could also argue that the slower rise in mortgage loan rates reduces timing pressure on prospective homebuyers. Unless you're hoping to take advantage of the government homebuyer tax credit set to expire soon, that seems to make sense.

Why home buyers may want to act soon

But if you think that you'll be better off waiting a year or two before you buy, you could be making a mistake. Let's use the shoprate.com mortgage calculator to make three comparisons based on the MBA's predictions of both the average 30-year FRM rate, and the median price of existing (as opposed to newly built) homes.

  1. Buy now, in the first quarter of 2010, and the average house should cost you $163,100, and your assumed mortgage rate (an average for the period) could be 5.1 percent. Monthly payments would be $886, and total repayment amount over the life of the loan would be $318,798.
  2. Wait a year, and the average house price might be $168,900, and the mortgage loan rate 6.0 percent. Mortgage payments would increase to $1,013 a month, and your total mortgage loan repayments would be $364,551.
  3. Wait even longer, until the first quarter of 2012, and the median house price could be $184,000, and the mortgage loan rate 6.3 percent. Monthly repayments would be even higher at $1,141, and the total 30-year repayment would be $410,899.

Thus, using the MBA's home price and rate predictions, we might conclude that prospective homebuyers should act now if able, before their potential mortgage burden increases substantially.

Whether refinancing or home buying, if you think now is the time to take advantage of low mortgage rates, find competitive mortgage rate quotes here.


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