Are You Ready For The Coming Rise In Interest Rates?

For the past two weeks interest rates have been trending upward. That's the bad news. What's worse is that interest rates will continue to rise throughout 2010 and beyond. Back in January 2009 the Federal Reserve, which is neither Federal nor a reserve, announced that they intend to drive interest rates to 4.5% on 30-year fixed rate loans. Since the Federal Reserve doesn't set mortgage interest rates they did the only thing they can do, which is begin purchasing Mortgage-Backed Securities.

Interest rates on mortgages are determined by the buying and selling of Mortgage-Backed Securities offered by Fannie Mae, Freddie Mac, and FHA. The more of these mortgage bonds that are purchased the lower mortgage interest rates go. However, the converse is true as well. If the mortgage bonds for sale do not get purchased then interest rates will trend up as a result.

Up until August 2007 a great deal of the Mortgage-Backed Securities offered for sale were purchased by foreign investors such as China, Japan, England, Australia, etc... They purchased upwards of 50% to 60% of the mortgage bonds on a fairly consistent basis. However, as the housing and mortgage crisis hit full stride the appetite for Mortgage-Backed Securities began to wane and interest rates began to rise. Foreign participation dropped to about 20% to 30% which hit interest rates pretty hard.

The government and the Federal Reserve knew that a housing and economic recovery was not likely in a higher interest rate environment and that is what prompted the Federal Reserve to come up with its plan to purchase Mortgage-Backed Securities. The strategy worked throughout 2009 but is coming to an end. The program was approved to purchase $1.25 TRILLION in mortgage bonds through March 2010 and year-to-date the Fed has purchased about $1.07 TRILLION. That leaves them with about $180 BILLION of the original amount for purchasing mortgage bonds through March. The Fed has purchased on average $20 BILLION per week and will be scaling that back weekly until the program expires. At the last Federal Open Market Committee meeting the Fed said that they will not be extending the program. That means that unless foreign participation picks back up interest rates will continue to rise to where they should have been all year.

All of this is a long way to warn you that higher interest rates are coming and if you want to take advantage of the current interest rate environment you should move quickly. If you have any interest in refinancing you should call right away before the interest rates move any higher and make it so there is no benefit in refinancing. If you are interested in purchasing a home you should accelerate your home search so you can benefit from both the lower interest rates and the Homebuyer Tax Credit currently available to those that qualify.

Please feel free to contact me with any questions or comments. I can be reached by e-mail at Shawn@YourFavoriteLender.com.