Mortgage rates continue to decline this week, following 10 year bond yields lower which fell last week. 30 year mortgage rates today are currently averaging 4.23 percent, the lowest rate so far in 2014. The Mortgage Bankers Association forecasted average mortgage rates to increase this year but so far the opposite has happened.
The MBA’s forecast for higher rates this year makes sense since the Federal Reserve Open Market Committee has started tapering their buys of long term U.S. bonds and mortgage-backed securities. The FOMC was buying $85 billion a month in these securities but announced in January their buys would only be $75 billion.
Then in January they announced they would only by $65 billion a month. The FOMC started these buys over a year ago and they were designed to force both long term bond rates and mortgage rates lower. This policy did succeed at forcing both mortgage rates and long term bond rates down to record lows in late 2012 and early 2013.
The FOMC’s other major policy that has sent interest rates down to record lows is keeping the federal funds rate near zero percent. The FOMC has kept the rate near zero percent for more than 5 years and unfortunately this has also hurt deposit rates. Right now the best CD rates on 12 month certificates of deposit are around 1.10 percent to 1.20 percent. The best savings rates are slightly lower at 1.00 percent.
If you bought a home or refinanced a mortgage over the past 5 years you lucked out, we probably won’t see mortgage rates or refinance rates this low again in our lifetimes. If you live on interest income earned from deposit accounts you are probably struggling since CD rates, savings rates and money market rates are also low.
In the coming years all interest rates will be heading higher, mortgage rates and bond rates have already moved higher in 2013 on the fears of the FOMC tapering. This sent long term U.S. Treasury yields up by more than 1.00 percent last year and also send conforming mortgage rates higher by around 1.25 percent last year.
Deposit rates remained low and will remain low until the FOMC increases the fed funds rate. This isn’t expected to happen for at least another year since the economy is still dicey and the unemployment rate is still rather high at 6.6 percent. Time and time again the FOMC has stated they won’t increase the fed funds rate until there is “full employment” or inflation higher than 2.5 percent. Full employment is an unemployment rate of 5.5 percent or less.
The FOMC released economic forecasts for the next several years and all the Committee members believe inflation will remain at or just under 2.00 percent for the next three years. Though inflation won’t trigger a higher fed funds rate the FOMC has also forecasted a need to increase the rate sometime in 2015.
This is good news for retires and others who have money in certificates of deposit or variable interest rate accounts because a higher fed funds rate will mean higher deposit rates. You will have to wait until the second or third quarter of 2015 for higher rates but at least there is light at the end of the tunnel.
By the end of 2014 average 30 year mortgage rates are forecasted to be around 5.00 percent and by the end of 2015 average 30 year rates are expected to be slightly above 5.00 percent. Forecasting rates longer than a year is tricky because we just don’t know how strong economic growth and inflation will be.
Regardless of where mortgage interest rates are in a year or two rates are moving higher. Home prices are also forecasted to increase over the next couple of year so if you have been waiting to buy a home now is a good time to do so. The higher home prices rise and the higher mortgage rates rise the less home you can afford.
Bank CD rates and variable interest rate accounts will move higher next year, by the end of 2015 the highest CD rates on 1 year certificates of deposit will be north of 2.00 percent. The best savings rates and money market account interest rates will also be above 2.00 percent. So if you have a CD account maturing over the next 18 months don’t lock into a long term rate, roll it over into a shorter term CD account of 6 months or less.
Right now there are actually some banks offering 6 month certificate of deposit rates that are a good deal right now. Checking on rates on cdrates.me I found Zions Direct offering 6 month CD rates at 1.00 percent which is higher than what most banks are offering for 1 year CD rates. If you do have a CD account maturing over the next year rolling it back over into a 6 month CD at 1.00 percent is a good idea.
Just remember to position for finances for higher interest rates in the coming years, refinance your mortgage if you’re current mortgage is more than 1.00 percent higher than current rates. Don’t lock into a longer term certificate of deposit at current low rates because you will lose out on higher interest rates in the coming years.