Smart Borrower Blog

Mortgage Interest Rates May Have Hit Bottom

Many market analysts are predicting that mortgage interest rates will not fall much lower than 5 percent   in the next few years, as plummeting rates have caused a flood of homeowners to start refinancing again.

The average rate on a traditional 30-year fixed rate mortgage has fallen from around 6 percent in November 2008 to the current historic low of about 5 percent. January rates were the lowest on record in the past 30 years of the Freddie Mac mortgage rate survey. Economists are forecasting rates in the 5 percent to 5.25 percent range for the next quarter or two.

Such impressively low rates have resulted in a huge spike in refinancing. In fact, the Mortgage Bankers Association reported Wednesday that refinance applications have increased 30 percent in the past week alone.
 
And while the rise in refinance loans is a shining star in the dark horizon of the U.S. mortgage market right now, it also means that interest rates are not likely to fall much lower. As home loan lenders find themselves swamped with refinance requests, there is little incentive to continue to drop the price on those mortgages.

This could be bad news for those trying to get in to the housing market at this point, as a continued surge of refinances could lead lenders to push mortgage rates up higher. With all the foreclosures on the market and with credit standards much higher these days, the complete recovery of the housing market depends on interest rates staying low.

That pool of homeowners eager to refinance will will likely remain large through the summer as a government program aimed at lowering monthly payments for borrowers goes into effect.

One government intervention that may help to keep rates low is the Federal Reserve’s purchase of mortgage-backed securities, particularly from struggling mortgage-holding companies.   Fed Chairman Ben Bernanke believes that the Fed’s buying role “seems to have brought down mortgage rates significantly. It allows people to refinance and to get out of high-rate mortgages,”according to statements made on CBS’ "60 Minutes" program Sunday.

The Fed plans to continue buying up "toxic" mortgage-backed securities throughout the year, hopefully creating room for lenders to keep their rates historically low.