Interest Rates Still Low, but for How Long?

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Wall StreetThe Fed may have bumped up the short term interest rate that banks pay to borrow money by a quarter-point, but for the rest of us, low interest rates are still here.

Despite months of predictions that interest rates must rise soon, average interest rates for 30-year, fixed rate mortgages slid back down to 4.93 percent in the week ending February 18, according to Freddie Mac's Primary Mortgage Market Survey.

That's close to the record low interest rates of end of last year, which bottomed out at a average 4.71 percent for the week ending December 3.

Average interest rates are expected to rise to 6 percent by the end of the year, pushed up by a long list of factors.
To begin with, the Federal Reserve won't keep its benchmark interest rates at zero forever. On Thursday, the Fed increased the interest rate it charges banks, the "discount rate," from .5 percent to .75 percent. The change shows that the Fed is beginning to back out of it's massive intervention in the capital markets. However, for now the Fed's most important interest rates are still set at effectively zero. That helps keep interest rates in general throughout the capital markets.

The Fed reaffirmed last month that it would keep this benchmark interest rate "exceptionally low" for an "extended period," language it has used since March.

Fed bankers usually raise the rate to help fight inflation -- however for now the pressure from inflation is off. The Labor Department said Friday that consumer prices edged up 0.2 percent in January while prices excluding food and energy slipped 0.1 percent. That was the first monthly decline since December 1982.

Interest rates could also be pushed up as the Fed stops buying new mortgage-backed securities the spring. The Fed bought the bonds during the credit crisis to make sure the money kept flowing into home mortgages, even as bond market overall froze over.

"The Fed's planned completion of its purchases of mortgage-backed securities will test the resiliency of the market... We expect any impact on mortgage rates to be modest and not derail the housing recovery," according to a statement from Freddie Mac.
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