The Federal Reserve recently said, not once but twice, that it has no intention of messing with interest rates over the next few months.
Following its April meeting the Fed’s Board of Governors said it will maintain the target range for the federal funds rate at zero to 0.25 percent and “the economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” Board Chairman Ben Bernanke, in his first-ever press conference, delivered the same message a short time later.
While mortgage rates move with the bond market rather than the federal funds rate, that market pays close attention to every move the “Fed” makes.
The reaction this time? Cameron Findley, chief economist for LendingTree, said there really wasn’t one.
“The market was looking for more guidance from the Fed, better information, maybe even an indication that the Fed was open to a QE3,” Findley said, referring to a possible third round of qualitative easing in which the Fed purchases large amounts of Treasury bonds to keep rates low. “The Fed remarks did indicate a shorter period for holding rates down than in the past, indicating that they are still concerned about the possibility of inflation,” he said,
Freddie Mac and Fannie Mae both project that the 30-year fixed rate for mortgages will average 5.2 to 5.4 percent during the remaining two quarters of the year.
Findley, however, is more hawkish about rates. Over the past few months the spread between 10-year Treasury notes and mortgage rates has compressed significantly. When mortgage rates reached their all-time low of 4.20 percent in September, the 10-year note was yielding around 2.50 percent, a spread of about 170 basis points. Since then the yield on the 10-year note has increased 100 basis points while mortgages rates have gone up only about 70 basis points. “If 10-year rates continue to rise,” he said, “it will have to push consumer rates higher.”
Findley does not think this is a totally terrible prospect. Borrower qualifications will continue to be tight, and higher rates may attract more private money into the market. “If qualification is in fact impossible,” he asked, “does it really matter if rates are at 5 percent or less?”
Alan Bachman, CEO of Amerifund Home Mortgage, cautioned consumers that rates don’t move up or down in a straight line so it is difficult to time the market.
“Borrowers know they can lock in an attractive rate but they should remember that buying down the rate can also make sense. By paying one point, one percent of the loan amount, they can lower their rate, usually a quarter-point. Buying down will cost $3,000 for a $300,000 loan but would lower the payment by more than $60 a month and save $22,000 in interest over the life of the loan. The points are tax deductible, which further lowers the cost,” he said.
The major “big box banks” now enjoy huge market share and tend not to be terribly competitive, Bachman said, Borrowers should double-check both rates and fees against those offered by smaller banks and mortgage bankers who are often more aggressive.
Bachman offered another tip: Make sure you are locking in the best available rate. “Some lenders will quote a slightly higher rate when you inquire about locking. This gives them a little bit of a cushion in case rates should rise.”
