Time May Be Running Out on Low Rates

By:
Kara Johnson - MortgageLoan.com

If you haven’t refinanced your mortgage by now, you might want to act soon if you want to get the best rates.

The Federal Reserve is scheduled to end its purchases of mortgage-backed securities on March 31, with many analysts predicting mortgage interest rates will rise significantly soon thereafter. The program, in which the Fed is purchasing nearly $1.3 trillion in mortgage-backed securities, is credited with sending mortgage interest rates to record lows and keeping them at or below 5 percent over the past year.
 
Once the program ends, many analysts predict rates will rise to around 5.7 – 6.0 percent over the coming months, perhaps as soon as the middle of the year. On a $250,000 mortgage, that works out to an extra $150 a month on a difference between 5 percent and 6 percent on a 30-year loan.
 

Home buyers may need more time

 
If you’re a home shopper, the picture is somewhat different. If you haven’t made an offer on a home already, it’s going to be difficult to conclude the process by the end of March. However, you still have through the end of April to qualify for the homebuyer tax credits - $8,000 for a first-time buyer, $6,500 for a repeat buyer – provided your offer is accepted by April 30 and the sale closed by June 30.
 
That’s not to say you’re completely out of luck if you don’t close by the end of April. Although some regions are showing signs of improvement, the real estate market remains soft, and could see further price declines in some areas. If you’re thinking about buying in an area where the housing market is weak, further price declines could moderate the effects of higher rates and the lack of the tax credit, particularly if a lot of foreclosures are still expected to come onto the market in your area.
 

Jumbo loans may not be affected

 
If you’re looking to buy or refinance a high-end home, the expiration of the Fed’s buying program might not affect you. Since the Fed is only buying “agency” mortgage securities – those issued by Fannie Mae, Freddie Mac or Ginnie Mae – its purchases only affect rates for conforming mortgages. If you’re looking to take out or refinance a jumbo loan – typically one exceeding $417,000 in most areas, but as high as $729,500 in high-priced communities – the end of the Fed program shouldn’t have much impact on the rates available to you.
 
Also, it’s not completely clear how much rates will change once the Fed program ends. The Fed has been scaling back its weekly purchases of securities to ease the transition back to a private investor-based market. As of the beginning of March, rates have not yet begun inching up in anticipation of the program’s end, so the eventual effect could be gradual and not as steep as some predict.
 

Possible advantages in waiting

 
If you’re in the market for a home, there may be other reasons to wait as well. If you don’t have enough cash available to make a 20 percent down payment, you might consider waiting until you can meet that standard. If you can’t put 20 percent down, you need to take out private mortgage insurance, the cost of which is like raising your interest rate by one-half to three-quarters of a percent. (although some programs, such a VA or USDA mortgages, allow borrowers to avoid PMI).
 
You also might consider waiting if your credit score is only so-so. Improving your credit score just a little can make a big difference in your interest rate. According to MyFico, raising your score from the mid-600’s to over 700 can trim your interest rate by about 0.8 percentage points on a 30-year loan – going from 5.7 percent to 4.9 percent, for example.
 
The bottom line is, if you’re looking to refinance, you’re probably better off acting sooner than later. If you’re looking to purchase, you should try to wrap it up soon, but don’t necessarily try to rush things to get it wrapped up by the deadline. There are other factors to consider as well.

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