Mortgage rates caught in the crossfire of the fiscal showdown in Washington

October 16th, 2013

Mortgage rates barely budged this week, as most of the financial community held its breath waiting to see what would come of the twin fiscal showdowns taking place in Washington. A temporary solution in the works may buy loan shoppers some time to take a good long look at their mortgage calculators and make a decision.                                       

The evil twins

The twin showdowns are:

  1. A partial closure of the federal government, in place since October 1, because Congress has failed to pass a budget for the new fiscal year.
  2. The threat of a default on US government debt obligations, because Congress has not extended the debt ceiling.                      

Both are bad, but the second one is potentially worse. While the first one slows the economy, a US default could both further damage economic growth and send interest rates soaring because lenders would feel they could no longer trust borrowers.

As this was written, Congress was mulling granting a temporary extension to the budget ceiling. This wouldn't resolve the underlying issues, but it would put off the potential crisis point.

Impact on mortgages

The immediate impact of all this on mortgage rates has been negligible, as 30-year fixed mortgage rates edged up by a single basis point to 4.23 percent in the week ending October 10. That muted reaction is deceptive, however. The slight change in mortgage rates is more because the outcome of the fiscal debate is so uncertain than because it is unimportant to interest rates.

In the near term, the government shutdown is a drag on the economy, and that prospect may have contributed to the decline in mortgage rates over the past few weeks. However, a US government default could cause a global credit crisis which would send interest rates skyrocketing. Again, a deal to temporarily raise the debt ceiling would at least delay that outcome.

Mortgage shoppers should take advantage of such a delay to consult their loan calculators and consider their options. Whether you are looking to buy a home or refinance, if a mortgage payment calculator indicates you could afford to make your move now, you might be wise not to delay. The opportunity to benefit from current mortgage rates may not survive the next government showdown.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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