New Mortgage Interest Rates Outlook - Mortgage Rates Predictions Rising
filed in Mortgages on Sep.17, 2008
Welcome back!
The Fed is losing control of the financial system. The Fed is trying to hold interest rates down and prevent major lenders and underwriters from collapsing, yet mortgage interest rate predictions are still rising - how can this be? And what does it mean for you?
The most important thing home owners need to understand about interest rate predictions is how the interest rates set by the Fed and the interest rates charged by mortgage lenders are related.
Interest rates that are set by the Fed flow into the cost of funds to mortgage lenders. Banks and other lenders don’t start out with all the money they lend out - they usually borrow on the wholesale market 90% of what they lend out to home owners, at rates lower than the mortgage rates they charge.
When the Fed lowers interest rates, it lowers the costs to mortgage lenders, so you would think that interest rate predictions would fall. However, financial institutions may choose not to pass on the savings to mortgage holders.
The reason is not profiteering - there is enough competition in the mortgage lending market to ensure that no one lender can profit unfairly. The real reason is that being a mortgage lender is now a whole lot more risky, and perceived risk raises interest rates.
Lenders are increasing interest rates to offset their losses on the few who will have their mortgages foreclosed. Until the plummeting housing market levels out, the risk of default will be high, and mortgage interest rate predictions will keep rising.
The Federal Reserve can’t lower interest rates forever. The primary interest rate (called the “nominal” rate) includes inflation. To calculate the “real” interest rate, subtract the rate of inflation from the nominal interest rate.
The thing is, when you do that just now, the result is a negative number! This means that nominal interest rates are less than the rate of inflation.
We all realise that this is a situation that surely cannot continue for any length of time. In the near future, the Fed will have to raise interest rates to at least break-even levels, matching the rate of inflation. When it comes, the interest rate rise will immediately flow through into mortgage rates.
In other words, it’s only a matter of a short time before mortgage rates rise again.
Mark Bennett is a staff writer for MoneyTalks.com, and contributes regularly to other financial sites.
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