Scott Phippen Lending Team

I can’t think of an easier year to predict the direction of interest rates than 2010.  It is safe to say that mortgage rates will be higher this year than they were in 2009.  Unfortunately for homeowners and the real estate markets, the days of a 4.5% 30 year fixed rate mortgage cannot last forever. 

In November of 2008, the Federal Reserve allocated $1.25 trillion towards the purchase of Mortgage Backed Securities.  As of January 15, 2010, $1.137 trillion of this budgeted amount has been spent.  By March 31, 2010, the entire $1.25 trillion is scheduled to be depleted.  Once the Fed steps out of the market, the likelihood of higher rates is probable.

Mortgage rates would have been about 1% higher had the Fed not intervened and purchased Mortgage Backed Securities.  On a $200,000 mortgage, it would cost approximately $8,000 to buy down the interest rate by 1%.  Essentially, the Fed has paid to buy down the interest rate by 1% for each person who has closed a mortgage since the program began.  For those who also qualify for the Federal tax credit offered for purchasing a home, a homebuyer borrowing $200,000 will have a total gain of $13,500 – $16,000!   

While inflation does not appear to be a major concern right now, the fear is that the massive amount of money the government is injecting into the economy will eventually lead to higher rates of inflation.  Inflation is the arch enemy to bonds, and leads to higher mortgage rates.  Given that the government has spent literally trillions of dollars stimulating our economy, they may be slow to increase the Fed Funds Rate to counter the growth of inflation.  Once inflation takes hold, it can be difficult to contain.  This would lead to aggressive interest rate hikes by the Fed to attempt to keep it at bay.

As interest rates move higher in 2010, there will be times when rates are more favorable than others.  Mortgage interest rates do not move in a straight line.  Therefore, although the trend will be for higher rates, there will still be opportunities to secure lower rates along the way.  Given that extremely low rates are still available, right now is an excellent time for a mortgage review.  Call my office to arrange a fifteen minute phone call so that we can review your situation and see if there are opportunities to save money.  If you are considering purchasing a home, you may want to act soon before the tax incentives expire and mortgage rates increase much higher.

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