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Regulators keep pushing rates upward

By Polyana da Costa · Bankrate.com
Wednesday, December 18, 2013
Posted: 5 pm ET

The Fed has scaled back on the stimulus program that had long helped keep mortgage rates low. Will the pullback make mortgage rates spike as some had feared? Maybe not. But you should still brace for higher rates.

Quicker than expected

The announcement that the central bank will reduce the pace of bond purchases from $85 billion per month to $75 billion wasn’t that big of a surprise to investors, says Paul Edelstein, director of financial economics for IHS Global Insight. Maybe the timing was a little earlier than some might have expected. but that hasn’t pushed rates up yet.

"So far, rates are holding fairly steady," Edelstein says. "The markets have had a fairly lengthy time to adjust to this."

How long? How 'bout since May?

Mortgage rates spiked by more than a percentage point after Fed Chairman Ben Bernanke said in May that the Fed was considering trimming the stimulus program this year.

Wednesday's announcement has been priced in since the Fed started hinting that it could taper this year, says Brian Koss, executive vice president for Mortgage Network in Danvers, Mass.

Koss agrees that the tapering alone won't cause mortgage rates to spike. But, coupled with surprising announcements that hit the mortgage market this week, there's no question that rates will climb soon.

One way they'll take more of your money

Fannie Mae and Freddie Mac said this week that they will increase fees on mortgages to consumers who don’t have sterling credit and down payments of at least 20 percent. The fees -- known in the industry as loan-level price adjustment -- can be paid upfront but often are added to the loan in the form of higher interest rates.

"Unless you have an 800 credit score, you are not safe from being hit with this increase," Koss says. "If you have a credit score between 680 and 760, you are going to be paying about three-eighths or at least a quarter more in interest rate on Fannie Mae and Freddie Mac loans."

Fannie and Freddie own or guarantee about two-thirds of new mortgage loans.

Sit down before reading this paragraph

The increase goes into effect in March. Let's say you have a credit score of 740 and you have a down payment of 10 percent to buy a house. If you get a $200,000 mortgage today, you would pay about $500 in loan-level price adjustment fees. After April 1, the same mortgage will have fees of $4,000 (or a higher rate).

Another way they'll pick your pocket

The entities have announced that they will increase a fee that they charge lenders. Yes, lenders pass the fee to consumers as well, so eventually it hurts your pocket. This fee, known as a guarantee fee, might cost borrowers an extra quarter of a percentage point in rate, lenders say.

At this pace, don't be surprised if, in a few months, you get quoted a rate that is 1 percentage point higher than what you could have gotten now, Koss says: "This is going to put a lot of pressure on borrowers."

Follow me on Twitter @Polyanad.

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