Recent news may signal the future of mortgage rates

March 27th, 2013

Loan calculators are at their most useful in a volatile interest rate environment, because tools like mortgage payment calculators can help consumers quickly put interest rate changes into dollars-and-cents perspective. If recent events are any indication, mortgage calculators may keep humming busily in the weeks ahead, as rates adjust to new developments.

Three developments of note

Mid-March saw three developments of note to mortgage shoppers:

  1. On March 15, the Bureau of Labor Statistics released the Consumer Price Index for February, showing a sudden rise of 0.7 percent that month. That would equate to an annual inflation rate of nearly 9 percent.
  2. The Federal Open Market Committee concluded its recent meeting. The Fed's press release included a commitment to continue the stimulative policy of buying mortgage-backed securities and long-term bonds until the economy shows sustained improvement.
  3. On March 21, mortgage rates halted a recent rising trend -- at least temporarily. Overall, rates have been rising since late November, and even with a decline during the week ending March 21, rates are still well above their low point and where they started the year.

Putting it all together

For anyone looking to buy or refinance a home, news that the Federal Reserve will continue to buy mortgage-backed securities and long-term bonds should be encouraging, since these policies have been instrumental in driving mortgage rates as low as they've gone. On the other hand, the fact that mortgage rates had been rising in recent weeks despite those policies shows that there are limits to what the Fed can control.

Mortgage lenders are no doubt cognizant that they are making a 30-year commitment to lend money at low rates, whereas Fed policies are subject to change from meeting to meeting. So, while the Fed can influence mortgage rates lower to a degree, there are limits to how far lenders will feel comfortable going -- and the market may already have reached those limits.

Inflation may ultimately force the hand of both mortgage lenders and the Fed. The Fed has stated repeatedly that continuing its low-interest rate tactics is contingent on inflation remaining in check. If inflation continues to rise at February's pace, the Fed may have to re-think its approach, and chances are mortgage lenders won't even wait for the Fed before they start raising rates.

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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