To understand the effects of mortgage rates, we have to first understand how they work. Mortgage rates are based off of Mortgage Backed Securities.
Mortgage Backed Securities (MBS) are basically investments in mortgage loans. MBS’s represent mortgage bonds and are made up of pools of mortgages. MBS’s are traded just like stocks and their value fluctuates on a daily basis. Rates are constantly changing just like stocks. Throughout a trading day, rates are changing up and down.
In January of 2009 The Federal Reserve announced that they would buy up $500 billion dollars in Mortgage Backed Securities.
This would drive mortgages rates down, which it did. Then in March of 2009 The Fed realized that they will need to keep rates low, much longer, so they decided to set aside $1.25 trillion dollars to buy down MBS’s. At this point in time, The Fed has already purchased over $900 billion in MBS’s. In essence, The Fed is artificially keeping mortgage rates low. At the end of March 2010, The Fed’s purchasing of MBS’s is set to expire.
So what happens at the end of March?
Most experts are predicting a large increase in rates that will happen very abruptly. We are talking about an increase of 1-1.5% in mortgage rates. Mortgage rates have been hovering around 5%, so we are looking at rates in the 6’s. If this happens and The Fed doesn’t step in and do something, this could really affect a buyer’s ability to buy a home. For example, if rates go up 1%, to have the same payment, the buyer would have to look for a home 10% less than the home they were previously considering. If rates go up 2%, then your purchase power just dropped 20%. This is a significant amount. If you were looking at a $200,000 home and rates go up 1%, now you would have to buy a $180,000 home to have the same payment.
Don’t let the best time in history to purchase a home, pass you by. Buy now, before it is too late.
Toby R. Lane
Senior Loan Consultant
Academy Mortgage Corporation