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.

MY QUICK TIP – When refinancing a home loan, in most cases, a no-cost loan is your best solution. Too many people pay thousands of dollars in closing costs and refinance every two years. These fees add up! You would be better off taking a slightly higher rate but paying NO fees. Call me with your specific questions at 801.501.7950. – Mike Roberts

For the past twelve months, I have been warning my clients of potential upward movements in mortgage rates. However, despite industry predictions, several days in June of 2010 saw mortgage rates that matched the historic lows seen in 2009. For those thinking of buying or selling a home, and for the many that have not yet refinanced their home loans, this presents an unprecedented opportunity.

Mortgage rates have benefitted lately from the situation in Europe, as global investors have sought the safe haven of our US Bonds. However, as the Euro’s freefall is finally showing some signs of stabilization, traders and investors may begin to sell their US investments and move their money back into the European markets. This could reverse the trend and cause home loan rates to move higher. With that in mind, it is time to consider whether you should be making any changes to your mortgage plan.

Confused about rates? Call 801-501-7950

Should I Consider a Refinance?
Given the current state of the market, if you have a 30 year fixed rate that is higher than 5%, or a 15 year rate greater than 4.5%, there is a high probability that you can improve the cost of your home loan. Also, if you have an adjustable interest rate of any kind, it is worth considering securing a fixed rate to eliminate your interest rate exposure. With mortgage rates at historic lows, there is only room for significant changes in one direction: up.

What are the Fees to Refinance?
In most cases, the type of mortgage that I suggest to my clients considering a refinance is one that does not have fees that are charged to the homeowner. Rather than paying the fees associated with a mortgage, or adding the cost of the home loan into your principal balance, a no-fee loan has a slightly higher interest rate. This is ideal for homeowners who are not certain they will be in their home long term, or for borrowers who are likely to refinance their home again in the next 10-12 years. If the plan is to keep the home and the mortgage for at least 12 years, then I may suggest paying fees to achieve the lower rate. As part of our mortgage review process, we evaluate the options and determine which is most appropriate for our clients. A mortgage is a very personal decision. If your mortgage advisor does not fully understand your long term goals, he or she is not able to ensure the best loan strategy that will help you accomplish your plans.

What is the First Step?
My team offers a free mortgage analysis. The process begins with a fifteen minute phone call where we gather the information needed to prepare our recommendations. In many cases, we find people who are already in the best mortgage strategy available. If that is the case, we will put you on our rate watch and will continually monitor your interest rate against the market and proactively contact you if an opportunity arises to improve your situation. Regardless, every homeowner who has a mortgage should take the time to have a free evaluation to ensure their loan is properly structured. Call 801.501.7950 or email me to arrange a time that we can discuss your review.

30 year fixed rate chart

I realize that the mortgage industry has created an environment where people feel they need to “shop” for the “best rate.” First of all, I want you to know that I guarantee that my team and I structure loans that will provide the lowest cost over the anticipated life of the loan. This means the rate I suggest may be lower or higher than the “quoted” rates around town. However, if it is higher, I guarantee that my recommended fees are lower to compensate for the higher rate. Realize that there is an inverse relationship between rates and fees, and I typically suggest a loan structure that is not typical for the industry (the way that “quoted rates” are computed.) Therefore, if you hear of a lower rate, do not conclude it is a better deal. You can rest assured that you are being advised by an accredited mortgage professional who understands your goals and objectives. In short, you are in very capable hands.

In the event that you do decide to “shop around,” I STRONGLY recommend you consider a few things. Take a brief minute and read through the following article. Feel free to pass it along to your friends and family as well. We hope you enjoy!

I can’t think of an easier year to predict the direction of interest rates than 2010. It is safe to say that mortgage rates will be higher this year than they were in 2009. Unfortunately for homeowners and the real estate markets, the days of 4.5% 30 year fixed rate mortgage cannot last forever.

In November of 2008, the Federal Reserve allocated $1.25 trillion towards the purchase of Mortgage Backed Securities. As of January 15, 2010, $1.137 trillion of this budgeted amount has been spent. By March 31, 2010, the entire $1.25 trillion is schedule to be depleted. Once the Fed steps out of the market, the likelihood of higher rates is probable.

Mortgage rates would have been about 1% higher had the Fed not intervened and purchased Mortgage Backed Securities. On a $200,000 mortgage, it would cost approximately $8,000 to buy down the interest rate by 1%. Essentially, the Fed has paid to buy down the interest rate by 1% for each person who closed a mortgage since the program began. For those who also qualify for the Federal tax credit offered for purchasing a home, a homebuyer borrowing $200,000 will have a total gain of $13,500-$16,000.

While inflation does not appear to be a major concern right now, the fear is that the massive amount of money the government is injecting into the economy will eventually lead to higher rates of inflation. Inflation is the arch enemy to bonds, and leads to higher mortgage rates. Given that the government has spent literally trillions of dollars stimulating our economy, they may be slow to increase the Fed Funds Rate to counter the growth of inflation. Once inflation takes hold, it can be difficult to contain. This would lead to aggressive interest rate hikes by the Fed to attempt to keep it at bay.

As interest rates move higher in 2010, there will be times when rates are more favorable than others. Mortgage interest rates do not move in a straight line. Therefore, although the trend will be for higher rates, there will still be opportunities to secure lower rates along the way. Given that extremely low rates are still available, right now is an excellent time for a mortgage review. Call my office to arrange a fifteen minute phone call so that we can review your situation and see if there are opportunities to save money. If you are considering purchasing a home, you may want to act soon before the tax incentives expire and mortgage rates increase much higher.