Snag a Mortgage Before Rates Rise! (Thanks Peter for the Explanation!)

To help keep interest rates low, the Federal Reserve has been purchasing mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac since early last year.  This week, the Fed has stated that they will no longer be purchasing these loans.  This was a planned move by the Fed, that has brought up fears that interest rates may rise 1-1.5% by the end of this year.  One person told me, "Sorry for the sarcasm, but I've heard that one before." 

True, I have heard many people "in the know" stating that rates were going up, up, up only to see a minor increase followed by another drop in rates. 

This time is expected to be different though.  And here is why. 

When loans are originated (i.e. when people purchase a home or refinance a loan), these loans are generally sold on the secondary market, referred to as "mortgage-backed securities." 

Well, if you are an investor, you want to put your money where you get the most return on investment given your risk parameters.  With the departure of Fannie Mae and Freddie Mac from the scene, private investors will once again need to be the ones to purchase these investments.  Keep in mind, these are the same types of investments that were sold a few years, causing investors all over the world to lose billions of dollars.  So there may be a little bias there...

Long story short, to be competitive with other investment vehicles, the loans need to have a higher return on investment for the investor, which translates to a higher interest rate to the borrower.

 (the remainer of this is taken from www.CAR.org)

MAKING SENSE OF THE STORY FOR CONSUMERS

• Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers.  With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.
• The federal tax credit for home buyers also is scheduled to end April 30.  The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers.  In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to C.A.R.'s 2009 Survey of California Home Buyers.
• Rising interest rates will have an effect on home buyers.  For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment.  If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.

So if you want to get the lower rates, be sure to act quickly- my crystal ball does not see any decrease in rates, but an increase is very possible on the horizon.