Interest Rate Trends
It’s interesting how much mortgage interest rates dominate discussion in the mainstream media. One would think based on media coverage that rates are what dictate home prices and housing demand.
However, the latest numbers show that mortgage interest rates are actually lower now than they were last year.
The rate on a 15-year loan averaged 6.34 percent, down from 6.37 percent a week ago. A year ago, the 15-year rate averaged 6.43 percent.
Five-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 6.30 percent this week, down from 6.31 percent last week. A year ago, the 5-year ARM averaged 6.39 percent.
One-year Treasury-indexed ARMs averaged 5.65 percent this week, down from 5.66 percent last week. At this time last year, they averaged 5.82 percent.
Interest rates fluctuate and resemble a roller coaster in terms of adjustments. When I started in the mortgage business in 2003, the benchmark 10 year bond yield was 3.98. As of Friday, June 29 the 10 year bond was at 5.02%. Over the last four years it has hit both levels high and low several times.
It makes sense that interest rates would go up as they were at such an all time low, yet every time they head up, mortgage interest rates end up coming back down. For much of the end of last year and this year, industry analysts have hoped and even expected the Federal Reserve to lower short term interest rates. With their last meeting that ended Thursday, the Fed has actually held rates steady for one year now after an 18 month raising campaign.
The effects of the “subprime” meltdown are being felt as borrowers with poor credit are now being required to have a downpayment on purchases. This slowdown in the housing sector is being perceived to place pressure on interest rates, yet the markets are actually lower now than they were last year before said “meltdown.”
So how should homeowners and prospective homeowners react to the current mortgage rate environment?
Homeowners with adjustable rate mortgages (ARMs) should attempt to refinance into fixed rate loans. While there may be a little bit of payment shock right now, locking in a long term rate will probably be in your best interest as rates are likely to rise over the next few years.
Prospective homeowners should consider their own financial situation and their local housing market as well as interest rates. Both short term and long term rates are very close right now, so the ideal is to get a long term mortgage should a suitable property become available. Prospective homeowners should also expect to have at least a 3% downpayment for FHA loans and 5% for all others unless they have good credit. Even with good credit, rates are more favorable with even some money down.
In my opinion, interest rates are likely to increase a little bit through the end of the year and the Fed is unlikely to make any changes to rates. I made a prediction in January that rates would be up .5% to .75% come this time of the year and though I was wrong about the Fed raising rates, long term rates have followed my prediction.
It will be “interesting” to see how the rest of the year plays out.