Fed Statement Could Mean Rates on the Rise

Federal Reserve officials met yesterday and issued a statement saying that their program to purchase $1.25 trillion of mortgage-backed securities will be winding down by the end of year. The Fed is the single largest buyer of mortgage bonds in the market today. The way mortgage companies set their interest rates is by figuring out the price that Fannie Mae and Freddie Mac are willing to pay them for the mortgage. Fannie and Freddie set their price by figuring out what investors on the bond market are willing to pay them for the Mortgage-Backed Securities (mortgage bonds) that they issue. When the Fed stops buying mortgage-backed securities, the demand for these bonds will be much less, and mortgage rates will go higher.

Since the Fed began purchasing mortgage bonds and intervening in the mortgage markets, interest rates on fixed rate mortgages have dropped a full percentage point below where they would be otherwise. A one percent increase in mortgage rates- from 5.25% to 6.25% -would cost an extra $250 per month on a $300,000 30 year mortgage. This is exactly what could happen in 2010 once the Fed stops buying mortgage bonds.

Fed officials have been signaling for some time that their unprecedented interventions in the mortgage markets may come to an end or even be reversed once the economy begins to improve. Homeowners and buyers should really consider acting now to take advantage of this window of opportunity to refinance or buy a home while rates are historically low.

~ Courtesy of Wendy Charles, LoanCentral LLC, 425.468.9321, WendyC@LoanCentral.com