What The Mortgage Rate Yo-Yo of 2010 Means for the Homebuyer in 2011

house made of paper money - mortgage ratesMortgage interest rates have never -- seriously never -- been lower than they were this year. Right around the second week of November, interest rates on a 30-year-fixed rate loan dropped to 4.17%, according to Fannie Mae -- by all accounts, the lowest they've ever been in the 40 years or so that industry organizations have been keeping track. That was the 5th consecutive week of record low rates -- rates that were so low, people with "good" rates started refinancing because that week's 3.57% on 15-year loans meant the payment was barely higher than the payment they'd had on their 6%, 30-year fixed mortgage.But I digress. That November rate-drop to end all rate drops was so extreme, no one really expected it to be sustainable over the long term. Rates had puttered up and down from around 4.2% to around 4.45% for months. The job market was lagging, and the housing market had never sobered all the way up from its post-tax credit hangover, so the Fed said it would do what it could to keep rates low for the foreseeable future, so the banks would pass those low rates on to consumers.

Then, the Obama administration cut a deal to extend the Bush era tax cuts. That adds a projected $900 billion to the deficit over those two years. And that toppled the first domino: T-bill rates, many of which back federally-insured mortgages, were pushed up. As the deficit increases, so does the risk associated with investing in Treasury bills, so they need higher rates for people to buy them. When the rates on T-bills go up, so do mortgage interest rates.

And, after that uber-low week in November, mortgage rates went up faster than the numbers on my scale over the last six weeks: well over a half point since the second week of November, hitting their highest point in six months. The last Fannie Mae data reports rates at over 4.8%, which Bankrate's overnight report pegs them at 4.97%. And it's been a spiky ride, with rates jumping around from 5% to 5.19% at one point, overnight, the second week of December, before cooling to just below 5% Christmas week. Infinity Home Mortgage manager Jeffrey Belonger told Bankrate that rates are "getting worse for two days, getting better for one day, getting worse the next day." Belonger says that mortgage rates right now are on a "daily yo-yo."

The knee-jerk reaction so many homeowners have is that even 5% is still so low, relative to the rates of years past, that the difference between 4.17% and 5% should not stop anyone from buying a home, and it probably won't. But it will put a new, lower cap on how much they can spend, which will likely translate into greater price pressures on sellers. Even a half-point increase from 4.5% to 5% on a 30-year fixed rate loan adds an additional $120 per month to the mortgage payment on a $400,000 home. Today's lenders impose very firm, clear budget constraints on buyers as to how much they can afford to spend for housing, so the extra interest cost will force many buyers to downsize their home price budget.

A spiky, upward trajectory is in the cards for 2011, too -- until the deficit truly gets under control, Treasury rates will likely continue to be volatile; the Fed just bought a bunch of T-bills in November to do its part at keeping rates low, so it's unlikely it will do more in the very near future. If the deficit keeps growing and, counterintuitively, consumer spending and confidence keep on their upward paths, mortgage rates will continue to rise.

So, what's a homebuyer or owner to do? Well, homebuyers who are in contract and looking for the time to lock their rates should consult with their mortgage professionals about doing it during the holiday lull in rates, before the volatility returns as expected after New Year's Day.

Fifteen-year loans are still offering below 4% rates, as another alternative for both buyers and homeowners looking to refinance at the lowest possible rates; and the daily interest rate yo-yo means that those looking to lock loan rates should be in touch with their mortgage brokers every day to catch them when they're relatively low.

Those still house-hunting should consider negotiating for the seller to pay a discount point and reduce their interest rates, especially if they are in a situation where they have stronger bargaining power vis-a-vis the seller. The slow holiday season for home sales puts wanna-be buyers in good position to do this, particularly for homes located in cold weather states, where very few buyers are active this time of this already-slow year.
Read Full Story

From Our Partners