Wednesday, August 18, 2010

Will Mortgage Rates Decrease?

Will Mortgage Rates Decrease?

In these turbulent times, the question on everyone's mind is what will the market do next? Can it get worse or have we seen the bottom? What will interest rates do? Will they continue to fall in an attempt to spur the economy or will the fed begin raising them soon? Correctly answering these questions can lead to sound financial decisions, but unfortunately things are not that simple.

Many people who are in a position to purchase a home can find some great deals on the market. Prices are lower than they have been in years and it is a total buyer's market. But many potential buyers are hesitant to make the purchase because they think mortgage interest rates will continue to fall.

While it is true that a drop in it of even .5% can translate into a lot of money over the life of a 30 year mortgage, the truth is that waiting might not be the best option. Here's why. Mortgage rates are not tied directly to the Federal Reserve interest rate. They are affected as much by shifts in the housing market itself as anything else. Let's say that you choose wrong and it begins to rise again. It's likely that a lot of people will be rushing to close on mortgages before it gets too high. This in turn will lead to a rise in home prices. Even an increase of $10,000 in the price of the average home can more than offset the savings that a half percent drop in interest rate will bring. Interest Rate move slowly but home prices can change overnight.

As the demand for homes begins to grow, this will spurn interest rates. Rises in mortgage interest rates are directly related to investor demand for mortgage backed securities. Right now demand is low, but the smallest hint of a recovery could send hedge fund and mutual fund managers into a buying frenzy. Overnight things could change dramatically.

Current expert opinion is that this will neither rise nor fall for the foreseeable future. But keep in mind that the market has a mind of its own formed from the unpredictable collective mind of millions of investors. The only thing that we know for sure is that the current housing market is the best we have seen for buyers in many years. Is it possible that you will save a little by waiting a month or two to buy a home? Yes. But is it really worth waiting for your dream home for savings that may never come?

By Todd Fletcher

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