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Mortgage rates drop, but expect a reversal

Mortgage rates drop, but expect a reversal | Ian Waldie/Getty Images

Mortgage rates edged downward this week, but don't take lower rates for granted. The Federal Reserve says it might start withdrawing support from the mortgage market this year.

As a result, mortgage rates are likely to go higher, so getting a mortgage soon is probably the smart play.

Taper talk again

For the better part of a decade, the Fed has been buying mortgage-backed securities. This means that the federal government has been subsidizing mortgage rates, keeping them low.

At the same time, the Fed has kept short-term interest rates low, to stimulate the economy by encouraging families and businesses to borrow money.

But the Fed wants to lift its foot from the economy's gas pedal because employment and inflation are rising. So the central bank has been raising short-term rates in the last 15 months. Now it's talking about reducing its purchases of mortgage-backed securities this year. That could put upward pressure on mortgage rates.

Investors have known that the Fed eventually would start talking about tapering its reinvestments in mortgage bonds. The central bank began that conversation on Wednesday afternoon, when it released the minutes of last month's monetary policy meeting.

Four years ago, when the Fed talked about tapering its bond reinvestments, mortgage rates surged higher. It looks like the Fed is trying to avoid a repeat by giving investors plenty of warning.

Making it clear

Here's the sentence from the Fed minutes that could move mortgage rates upward in coming days: "Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the Federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year."

"I don't know if they can get much clearer than that," says Alan MacEachin, chief economist for Navy Federal Credit Union. "They are telling the markets unless something changes in the economy, they will begin to normalize their balance sheet, and begin that process later this year."

The central bank has a lot more work to do, though.

"The Fed halting the reinvestment of maturing bond holdings is only dipping a toe into the water of winding down a $4.5 trillion balance sheet," says Bankrate's chief financial analyst, Greg McBride. "Does anybody really think the Fed can meaningfully ratchet down a balance sheet of that size before the next economic slowdown comes along? It's very doubtful."

Meantime, mortgage rates are likely to rise through homebuying season, making this a good time to jump in and shop for a mortgage.

Mortgage rates this week

The benchmark 30-year fixed-rate mortgage fell this week to 4.24 percent from 4.3 percent, according to Bankrate's weekly survey of large lenders. A year ago, it was 3.75 percent. Four weeks ago, the rate was 4.38 percent.

The mortgages in this week's survey had an average total of 0.26 discount and origination points.

Over the past 52 weeks, the 30-year fixed has averaged 3.9 percent. This week's rate is 0.34 percentage points higher than the 52-week average.

  • The 15-year fixed-rate mortgage fell to 3.48 percent from 3.49 percent.
  • The 5/1 adjustable-rate mortgage fell to 3.45 percent from 3.49 percent.
  • The 30-year fixed-rate jumbo mortgage fell to 4.19 percent from 4.23 percent.

The Fed isn't all that's threatening to push mortgage rates higher. The March employment report is scheduled to be released Friday morning, and the consensus is that it will say the economy grew by a net 178,000 jobs in March. But payroll company ADP says private-sector employment increased by a much higher-than-expected 263,000 in March.

Weekly national mortgage survey

Results of Bankrate.com's weekly national survey of large lenders conducted April 5, 2017 and the effect on monthly payments for a $165,000 loan:

30-year fixed15-year fixed5-year ARM
This week's rate:4.24%3.48%3.45%
Change from last week:-0.06-0.01-0.04
Monthly payment:$810.74$1,177.94$736.33
Change from last week:-$5.80-0.81-$3.67

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