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Historic. Shocking. These words have been used to describe recent rate increases. But why are mortgage rates going up so fast? Driving factors revealed in this short synopsis….
If you’ve been sitting on the fence, undecided whether or not to apply for a mortgage or to refinance your existing loan, you’ve probably worn out the toe of your shoes (and the seat of your pants) by kicking yourself repeatedly since the recent surge in interest rates. But all hope is not lost. Most financial experts say that while rates likely won’t return to their former low levels, it’s also not likely they’ll have another similar jump before the end of the year.
Of course, those are the same experts who predicted rates would remain low until the unemployment rate falls to 6.5 percent, so you might want to take that guidance with a huge grain of salt and lock in your rate now.
The bigger question is this: Why did rates take such a big jump in just a few days? Like a lot of interest rate issues, this one is tied in with bonds.
To help bolster the faltering economy, the Federal Reserve initiated a bond-purchasing program, spending $85 billion each month to buy U.S. Treasury and agency mortgage-backed securities to help keep interest rates low, in turn spurring consumer purchasing. But earlier this month, Fed Chairman Ben Bernanke told reporters the Fed could begin tapering off bond purchases in the coming months, perhaps even terminating the program by the middle of 2014.
In a statement issued on June 19, the Fed also noted that it “sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.” It also expects inflation to be at or below the 2 percent objective set to further economic recovery.
Taken together, the statement and Bernanke’s comments were enough to send stock market investors running for cover, jacking interest rates upward: Once the news was announced, the average 30-year mortgage rate jumped from 3.74 percent to 4.14. The largest mortgage lender in the U.S., Wells Fargo, hiked its rates from 3.9 percent to 4.5 percent.
The Fed statement fell short of predicting when, and even if, it would consider limiting its bond purchases, instead saying that it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
And, like its earlier statements, the Fed noted that it intends to keep the federal fund rate low “at least as long as the unemployment rate remains above 6.5 percent,” which is pretty much what it’s been saying in every statement since at least January.
Although the rise in rates almost immediately resulted in a decline in mortgage applications, the housing market appears strong – so far.
What’s the take-home message? If you’ve hopped off the fence to attend your own, private pity party, stop playing Monday morning quarterback: Lock in your rate now, and save yourself the cost of another new pair of butt-kicking boots.