mortgage

Mortgage rates drop to 2010 low

Mortgage rates are close to a record low, and probably won't stay there much longer. Experts say it's time to get a loan now, or end up with a higher rate later.

The benchmark 30-year fixed-rate mortgage fell 4 basis points this week, to 5.11 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.45 discount and origination points. One year ago, the mortgage index was 5.34 percent; four weeks ago, it was 5.15 percent.

The benchmark 15-year fixed-rate mortgage fell 1 basis point, to 4.51 percent. The benchmark 5/1 adjustable-rate mortgage fell 5 basis points, to 4.51 percent.

Mortgage professionals believe rates are poised to jump sharply within a few weeks. For those who are willing and able to refinance, it is time to act. Homebuyers tend to be more influenced by home prices than mortgage rates, but they, too, should keep in mind that mortgage rates could be a full percentage point higher a year from now.

Weekly national mortgage survey
Results of Bankrate.com's Feb. 17, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed15-year fixed5-year ARM
This week's rate:5.11%4.51%4.51%
Change from last week:-0.04-0.01-0.05
Monthly payment:$896.88$1,263.08$837.01
Change from last week:-$4.06-$0.85-$4.91

Mortgage rates are expected to rise because the Federal Reserve plans to stop buying mortgage-backed securities by the end of March. For the last year, the Fed has been buying more than four-fifths of newly issued mortgage bonds. When the central bank stops buying them, private investors will have to step in. By most indications, investors are more risk averse than the Fed when it comes to mortgages. To compensate for the perceived risk of new mortgages, investors might demand substantially higher interest rates.

"It's difficult to know exactly what will be sufficient to entice private investors back in," says Michael Fratantoni, director of single-family research and economics for the Mortgage Bankers Association. "I would suggest an at least 50-basis point increase as soon as the Fed gets out, and then. ..."

Whoa, wait. We interrupt Fratantoni to highlight something he said: "as soon as the Fed gets out." What does he mean? He explains: "We see that happening in the second quarter, shortly after the Fed is finished with their purchases."

The MBA's forecast, then, calls for mortgage rates to rise by half a percentage point between the end of March and the end of June. And that's a conservative outlook. Lots of mortgage lenders tell their customers that they expect rates to zoom half a percentage point or more within days or weeks of the end of March.

6 percent by year-end?

Let's pick up where we interrupted Fratantoni: "I would suggest an at least 50-basis point increase as soon as the Fed gets out, and then we're anticipating that, with the economy growing, the job market beginning to recover and the housing market beginning to recover as well, that mortgage rates are likely to go up another 50 basis points through 2010, and end the year a little above 6 percent."

That's a forecast of a rise of a full percentage point, from around 5 percent to around 6 percent, in the final nine months of this year. The MBA's forecast matches the conventional wisdom in the mortgage industry that rates will rise a percentage point this year.

Bob Walters, chief economist for Quicken Loans, praises the Fed for "extraordinary measures to pull the economy out of a nosedive," and he doesn't envy the difficult task it faces of unwinding everything in an orderly fashion. He says: "My advice to those looking to refinance or purchase is that, while none of us can predict the exact timing, there will come a day when interest rates begin to rise."

Walters says: "I like a blackjack analogy. If a person hits on 18, it is possible the next card could be a 2 or 3 -- but it's unlikely. People who wait for mortgage rates to drop are hitting on 18. It is possible that mortgage rates could fall, but unlikely. It's far more likely, as the days pass, that the next move for mortgage rates will be toward higher rates."

If you're in the market for a mortgage or refinance, you can look for the best interest rate by searching Bankrate's rate tables.

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