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Mortgage Rates Are at the Lowest Level of the Year

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We started 2014 with all the economists and their uncles predicting that mortgage rates will increase through the year. Even Mortgage Bankers Association (MBA) predicted that we would touch 5% for a 30-year fixed mortgage by the end of the year.

Their prediction was grounded in solid facts. Fed continues to taper the bond purchase, which is primarily the reason why mortgage rates are so low. Also, the economy was supposed to improve through the year. Good news for economy is usually bad news for mortgage rates. However, last week Freddie Mac as part of Primary Mortgage Market Survey (PMMS) reported that 30-year fixed rates were at the lowest level of the year. At 4.10%, it was the same as the week before, which is couple of basis points (bps) lower than the lowest rate seen this year i.e. 4.12%.

15-year fixed rate at 3.23% and 5 year adjustable rate mortgage (ARM) at 3.01% are also close to the lowest levels seen in 2014.

So what changed from the prediction early in the year to now?

First of all predicting mortgage rates is a very tricky business. Mortgage rates are impacted by global political and economic events. And it’s near impossible for anyone to predict those events in advance. It’s no surprise then that MBA, that has some top economists on its payroll, has got the prediction wrong for last four years in a row. Political events in Ukraine, Iraq, and Israel in the last few months created uncertainty for investors. And when investors and money managers are uncertain they usually take the flight of safety, which is investing in bonds. Since mortgage-backed securities is a type of bond, it improves their yield, thus bringing the mortgage rates down.

Closer to home, the economy is not growing at a pace earlier predicted. While the job market has improved and unemployment rate has gone down, there are still millions who are unemployed or under-employed. Two-thirds of US Gross Domestic Product (GDP) is derived from consumer spending. A relatively weak job market means less disposable income, hence less spending by the consumers.

Where do we go from here?

The above-mentioned political events will most likely not have an immediate solution. Combine that with debt problems in Europe and slower growth in China, and we have a situation where interest rates should continue to be low. It’s impossible to predict if they will remain at this level or not. But even with a benchmark of last 5-6 years, any rate under 5% should be considered a low interest rate. With the way world events and the local economy are progressing, at this time, it’s hard for me to visualize how MBA’s prediction of 5% interest rate on a 30 Year Fixed mortgage by end of 2014 will come true.

What does this mean to you?

If you already own a home, there could be a refinance opportunity for your current mortgage. And if you were thinking of buying a home, this is a perfect time to lock in your mortgage on a long term fixed interest rate loan.

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Amazon.com Best-selling author, Shashank Shekhar (NMLS 8176) is a mortgage lender with Arcus Lending, offering loans for home purchase and refinance. Shashank has been featured as a mortgage expert on Yahoo! News, ABC, CBS, NBC and FOX. He has been named "Top 40 under 40" most influential mortgage professionals in the country.