What a difference a month makes. When Freddie Mac issued its monthly Economic and Housing Market Outlook on Dec. 9 it forecast interest rates, 4.61 percent at the time, would inch up slowly through 2011 to 5 percent by the end of the year. By the time the next forecast came out on Jan. 12, Freddie Mac’s economists had upgraded that prediction to an average rate of 5.1 percent for the second quarter of 2011 and 5.5 percent by the end of the year. The 30-year fixed-rate mortgage dropped to a historic low of 4.17 percent during the week ended Nov. 11 and then started to climb. While rates have backed off from the Dec. 30 level of 4.86 percent, they are expected to rise again and soon.
The year-end spike was due partially to the announcement by the Federal Reserve of a second round of qualitative easing known as QE2, under which the Fed will purchase some $600 billion in government bonds over an eight-month period.
At the time, experts such as Tim Dale, executive vice president for lending at BB&T Bank, said “QE2 will set the direction for rates over the next few months.”
Rates probably will further be affected by some key changes announced by Fannie Mae in late December that will raise “loan-level price adjustments” and “adverse market delivery charges” on some loans. Without getting too deep into underwriting gobbledygook, the new fees raise the cost of some conventional mortgages by a quarter to one-half point and these fees undoubtedly will be passed on to consumers.
Affected are loans to buyers with credit scores below 740 who are taking mortgages with a loan-to-value ratio greater than 70 percent. Cameron Findlay, LendingTree’s chief economist, said that “noticeably different will be fees to borrowers with higher credit scores.”
In the past, a credit score of 720 meant buyers did not pay additional fees. Now, even those with a 720 FICO score with an 80 percent loan-to-value ratio will pay an additional 0.50 percent.
Findlay noted that while Fannie Mae’s changes are slated to go into effect on April 1, “borrowers will likely see an impact in rates by Feb. 1.”
Other factors also will affect the interest rate picture. The bond market, which drives interest rates, is very sensitive to news anywhere in the world that might affect business or the economy. With unemployment, housing and business lending still uncertain, the bond market and thus interest rates probably will continue to be volatile.
Deryck Cheney, branch manager of Fairview Independent Mortgage in Haymarket, Va., said that is one reason why home buyers are making a mistake when they focus exclusively on interest rates.
“This is a great time to buy,” he said. “While there is still time to get into a house before the next wave, once the media starts reporting that the market is moving home prices may go up faster than rates.”
Instead of worrying about small swings in the interest rate from week to week, Cheney said buyers would do better to analyze the resulting monthly payment and a rent vs. buy scenario.
“A tiny rate change makes only a tiny change in the payment and even a half-point jump increases the payment less than $100 on an average-priced home,” he said. “How does that payment measure up to the rent you might be paying in a year? The difference a half-point makes is even less significant when you consider that any increase in the payment is tax-deductible.”
