The Federal Reserve recently announced that it intended to keep “interest rates” low through at least mid-2013. This unprecedented statement shocked the markets and helped drive mortgage rates down to match historic lows. As investors digested this information, many concluded the Fed is essentially stating that they believe our economic growth will remain stagnant for some time. Although the markets appreciated the transparency of the Fed’s statement and assurance that lending rates will remain low, it was a sharp contrast to prior predictions that our economy would be at a healthy growth rate by the end of 2011. The acknowledgement that our economic recovery has been “significantly slower” in the first half of 2011 than previously expected was more in line with what many on “Main Street” have been saying all along.

How Will this Decision Impact Mortgage Rates?

There are two interest rates that are controlled by the Federal Reserve – the Fed Funds Rate (a lending rate at which banks with deposits at the Federal Reserve lend money to other banks overnight) and the Discount Rate (the interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank). Both of these are very different from mortgage rates. A mortgage rate can be in effect for 30 years while a rate set by the Fed can change from one day to another. Therefore, this recent statement by the Fed does not guarantee that mortgage rates will stay in current ranges until mid-2013, only that it is likely short term rates will remain at current levels for the next two years (home equity rates, car loan rates, credit card rates, etc.).

One of the greatest determining factors in the direction of mortgage interest rates is the rate of inflation. Being that mortgage rates are set based on the price of a mortgage backed security (a bond sold to investors that is backed by mortgage notes), inflation is the arch enemy of any type of fixed income note or bond. Therefore, as inflation increases, mortgage rates will move higher regardless of how low short term interest rate are. In fact, if the Fed continues to hold short term interest rates low in the face of inflation, mortgage rates will increase further. A failure to increase short term rates in an inflationary environment will be viewed as a lack of effort by the Fed to fend off inflation, and long term rates will be the victim.

What Action Should Each Homeowner Take?

One primary benefit of the current low interest rate environment is the opportunity for homeowners to reduce the interest rate they pay on their mortgage. If you have a mortgage, or any other consumer debts, now is the time to have your mortgage reviewed by a professional who can advise you on the opportunities and determine if you should make a change to your home loan. If it is a wise decision, be mindful of the expenses to do the loan and the amount that most lenders add to your principal balance to refinance your mortgage. Any time a no-fee loan is available, that is likely the best solution to consider. Most of the loans we structure do not have any closing costs paid by the borrower and do not increase the principal balance of the mortgage. Our goal is to have homeowners reduce their mortgage liabilities, not add more to their balance. If you have any questions, or if you would like a no-cost mortgage review, call me at 801-501-7950 or e-mail me at mike@citycreekmortgage.com.

With low interest rates, tax credits offered by the Federal Government, and lower home prices, a “Perfect Storm” has created a favorable time to purchase a home. With two out of three of these incentives ending soon, time may be running out.

Interest Rates

Since November of 2008, The Federal Reserve has purcahsed a significant amount of mortgage backed securities to drive down interest rates. At the end of March, the entire budget of $1.25 trillion will be depleted, and this program will expire. This will undoubtedly result in upward pressure on mortgage rates.

As mortgage rates move higher, a homebuyer’s purchasing power decreases. Consider the following example:

Assume that Bill and Carol are comfortable with a mortgage payment no higher than $1,750 per month (this payment does not include taxes or insurance premiums). With a down payment of 20% on a 30 year fixed rate mortgage at 4.875%, they can borrow approximately $330,500. However, if mortgage rates increase by 1% up to 5.875%, given the same parameters they can only afford to borrow $295,500.

When you look at the last 30 years of home prices and interest rates, now is an incredible time to purchase a home. Back in 1982, the average price for an 1,800 square foot home was $100,000 with an average interest rate of 18%. A principal and interest payment for this scenario was $1,507. Contrast that with the current average home price of $200,000 and an interest rate of 5%. The payment on a similar home today is only $1,073.65. That is a monthly payment savings of $455.35 from 1982!

Tax Rebates

For first time buyers, there is currently an $8,000 tax rebate paid by the federal government. This is not a tax deduction, but rather a tax credit that wil put this much cash in your pocket. There is also a $6,500 tax credit offered for current homeowners who have owned a home for at least five years and purchase a different home as a primary residence. Both tax credits are set to expire on April 30, 2010.

Housing Prices

Lastly, it is important to note thathoems are more affordable today than they have been in years. Although home values will likely remain low for awhile, the reduction in home prices has slowed. This is a positive signal that values may be stabilizing.

The Michael Roberts Team at City Creek Mortgage is uniquely structured to ensure exceptional mortgage advice and loan management. If you or someone you know are considering purchasing or refinancing a home, contact me to review options. A 15 minute review will help ensure you are in proper mortgage in your current home or a home you plan to purchase.

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