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Fed gives borrowers lower rates

By Polyana da Costa ·
Thursday, September 19, 2013
Posted: 5 am ET

The Federal Reserve has given homebuyers and some refinancers a second chance.Ben Bernanke

Mortgage rates have dropped about an eighth to a quarter percentage point since the Fed announced Wednesday that it won't cut its bond-purchasing stimulus program just yet, says Michael Becker, a mortgage banker at WCS Funding in Baltimore.

"That's a significant move for a day," he says. "I haven't seen the 30-year fixed conventional around 4.5 (percent) in a while."

Central bank sent mortgages up and down

The Fed says it will continue to spend $85 billion per month in Treasury and mortgage bond purchases to support job growth, the housing market and mortgage rates.

Since May, mortgage rates have shot up because the Fed had said it would likely slow the pace of purchases this year. Many economists expected the Fed to announce the cuts after its two-day meeting Wednesday.

But the Fed surprised borrowers with good news that has resulted in lower rates for borrowers locking a mortgage rate today.

Granted, the Fed didn’t manage to send rates back to where they were in May, when the tapering talk started. The 30-year fixed was near record lows then, around 3.5 percent. But mortgage rates could have jumped about a quarter of a percentage point had the Fed stuck to the original plan of tapering the purchases, says Paul Edelstein, director of financial economics at IHS Global Insight. That means borrowers would have been locking a rate above 5 percent today.

It's best to act quickly

The break in rates could be short-lived. The markets may shrug off the good news in a few days and rates could bounce back up. But it's unlikely that rates will jump significantly, at least until the next employment report, the first Friday of October.

That's because the Fed hasn't ruled out the possibility of reducing the purchases this year. Chairman Ben Bernanke says much will depend on how the labor market performs.

"The truth of the matter is tapering is coming one way or another," Becker says. "They can't have quantitative easing forever. At some point, rates will have to rise."

Enjoy the low rates while you can!

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