Have you been checking out interest rates lately? Maybe you’re getting closer to refinancing your current mortgage and you want to get a pulse on where rates stand right now and if you should go ahead and lock something in or wait? If so, you’re not alone. It’s relatively easy to see what interest rates are doing with a few clicks on the keyboard. The problem with that approach is you never know who’s on the other end quoting those rates and if those rates are good or not. We understand that completely. It’s a guessing game trying to peer into a crystal ball and see what rates might be doing in a few weeks, a few months or even into next year.
How Low are Current Home Loan Interest Rates?
Mortgage rates hit their historic low back in November of 2012 when Freddie Mac reported the average 30 year fixed rate hit 3.35%. For February of 2018, that same rate is 4.33%, nearly a full percentage point higher. But note, it took six years for rates to rise to current levels. If you are watching mortgage rates then you’re probably very well aware that the Federal Reserve raised the Federal Funds rate by another 0.25% at their March meetings, the first such increase since December of last year.
A 30 year fixed rate loan is tied to a specific mortgage bond such as the FNMA 30-yr 4.0 or the FHLMC 30-yr4.0 And like any bond, when the price of that bond goes up, the yield falls and vice versa. Investors buy bonds for security. While the yield is comparatively low compared to a favorite stock on Wall Street, the investor is guaranteed a return. When the economy appears to be softening, investors will reallocate their portfolio, moving money out of stocks and into the safety net of bonds, including mortgage bonds. Following a classic supply vs. demand practice, the greater the demand for something the higher the price. With a bond, a higher price means lower yields, or lower interest rates.
When the Fed raises rates, it does so with an expectation of better days ahead as economic conditions continue to improve. Higher borrowing costs, in theory anyway, slow down spending which in turn keeps a lid on inflation. That’s what the Fed does.
Will Current Home Loan Interest Rates Continue to Go Down?
You may also recall the Federal Reserve bought millions of dollars’ worth of bonds, treasuries and mortgage-backed securities in an attempt to give the economy a jump start, referred to as “quantitative easing,” or QE. The Fed’s plan back in 2010 was to purchase more than $1 trillion in mortgage backed securities over time. Today, the Fed and other investors are selling those bonds. This in turn means more supply and less demand. Lower demand results in a lower price which results in higher rates. This tells analysts higher rates are ahead and we agree.
Where are rates today compared to say six months ago? Last September, rates averaged 3.81% according to Freddie Mac, or about 0.50% lower than where they are today. If you take a $250,000 loan at 30 years and a 3.75% rate the principal and interest payment is $1,155. At 4.25%, the payment is $1,227 for a difference of about $72.
Should I Refinance in 2018?
So now it’s decision time. If you’re going to refinance, should you refinance now or wait and see if rates fall back to previous levels? That’s certainly your call and while no one can accurately predict the future we can make a forecast based upon previous and current home loan interest rates. The economy is picking up steam. More people are at work and wages are on the rise. Most recent jobs data from February showed the national unemployment rate continued to fall, hitting 4.1% with more than 300,000 new jobs added. These are the types of numbers the Federal Reserve looks at every six weeks when they meet for their two day round of FOMC meetings. But other investors are looking at the very same information and it’s apparent that the likelihood of the Fed lowering rates or the economy making a U-turn is very low. The smart money might very well be to lock in rates today.