Freddie sees mortgage rates hitting 6% in 2010
Saturday, December 26, 2009
After hitting an all-time low in early December, the average rate on a 30-year, fixed-rate mortgage rose to 5.05 percent this week and could climb to 6 percent by the end of 2010, if not sooner, according to giant mortgage financier Freddie Mac.
The results are noteworthy because rates have not topped 5 percent since the last week of October, when they reached 5.03 percent, based on the results of this closely watched survey, which polls lenders during the first three days of every week.
Many firms regularly track interest rates and come up with slightly different numbers because they survey different lenders at different times of the day or week. But several have reported the upward trend in recent weeks. They attribute it in part to the effects of the holiday season, when demand for buying and refinancing homes dies down and financial markets coast through the end of the year.
"However, this is also a glimpse of what we're going to see in 2010," said Greg McBride, a senior financial analyst at Bankrate.com, a personal finance Web site.
The key catalyst for interest rates going forward will be the end of a Federal Reserve program that buys a sizable chunk of mortgage-backed securities issued by firms such as Fannie Mae and Freddie Mac. That program succeeded in immediately pushing mortgage rates well below the 6 percent mark when it was announced last year.
But the Fed has committed to winding down the program by March. The central bank is betting that by gradually tapering its purchases, private buyers of mortgage-backed securities, who have largely been absent from the market, will return and rates won't rise much.
But Amy Crews Cutts, deputy chief economist at Freddie Mac, said interest rates are bound to rise to 6 percent by the end of 2010 because private buyers will demand a higher rate of return on the securities than the Fed did. Lenders may have to raise the rates they charge to consumers in order to make that happen.
"Extraordinary resources have been put into keeping the rates down and supporting the mortgage markets and it's hard to imagine that the rates can go much lower than they are," Crews Cutts said. "Anything we get at or below 5 percent is a gift at this point."
This week's Freddie Mac survey found that the 5.05 percent average on 30-year fixed-rate loans (with an average 0.7 point) was up from 4.94 percent the previous week but down from 5.14 percent at the same time last year. The all-time weekly low since the firm started tracking the numbers in 1971 was in the first week of December, when rates fell to 4.71 percent.
Many borrowers have not been able to secure the best rates because they lack the stellar credit scores and hefty down payments that many lenders now demand. Some who have tried to refinance have not been able to qualify because their home prices have plummeted to the point where they now owe more on their mortgages than their homes are worth.
But anyone who can secure a loan should not wait much longer, especially if they are looking to refinance, McBride said. Homeowners are more sensitive to interest rates when they refinance than when they buy a home.
"The difference between 5 percent and 5.5 percent could mean the difference between refinancing or not," he said.
But the interest rate is less critical to people who want to buy a home, McBride said. In that case, price and affordability should trump interest rates.
The general rule of thumb is that your monthly mortgage payment (property taxes and insurance included) should not exceed 28 percent of gross pay. All your loans combined -- mortgage, car, credit card, student debt -- should not exceed 36 percent.
"Yes, a higher mortgage rate would steal some buying power, but it doesn't price buyers out of the market entirely because 6 percent is still pretty low," McBride said. "If you can't afford the house with rates at 6 percent, you can't afford the house."