What Every Homebuyer Should Know About Mortgage Rates in 2014

Overwhelmed by all the mortgage predictions being thrown around? This guide can help you start laying out the facts so you know what to expect as the year progresses.

Mar 23, 2014 at 11:00AM
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Get in while the gettin's good.

That's one way to sum up what homebuyers should know about mortgage rates in 2014.

Of course, there's a little more to it than that, so if you're looking to get the best possible rate in 2014 you should be aware of where mortgages stand and where experts think they're going.

What's happening now
The good news is that rates are still attractive right now. In January, the average commitment rate on a 30-year, fixed-rate mortgage was 4.43 percent, according to Freddie Mac. That's up from last year, but still lower than the annual average of every year from 2011 back to 1971. (Freddie Mac was chartered by Congress in 1970.)

The bad news? Rates will continue to rise. How high they rise depends on two things: the Federal Reserve and the economy. Here are a couple of ways those two factors are affecting rates.

The Fed is scaling back its economic stimulus program
The Fed has reduced its bond purchasing program, which helped to keep mortgage rates low. As it continues to scale back on bonds, rates will likely increase.

Investors just aren't that into mortgage notes
According to Reuters, "Upbeat trade data from China and an optimistic economic outlook from Federal Reserve Chair Janet Yellen whetted investors' appetite for risk."

So what does that have to do with mortgage rates? Confident investors don't buy safe investments like mortgage notes -- they bet on riskier (and more profitable) investments. That usually means that mortgage rates will go up.

Predictions for 2014
It's likely that mortgage rates will rise above 5 percent this year, according to the Mortgage Banker's Association (MBA).

"We expect mortgage rates will increase above 5 percent in 2014 and then increase further to 5.5 percent by the end of 2015," said Jay Brinkmann, MBA's Chief Economist and Senior Vice President for Research and Education in a press release. "As a result, mortgage refinancing will continue to drop, and borrowers seeking to tap the equity in their homes will be more likely to rely on home equity seconds rather than cash-out refinances."

What this means for homebuyers
Increasing rates is no reason to lose your head, so don't let it influence your buying decision. If you want to feel ecstatic about a 5 percent mortgage rate, just compare it to the average annual rate in 1981: a whopping 16.63 percent, according to Freddie Mac.

But if you're currently in the market for a home, there are a few things you should do to get the best loan.

First, decide which type of loan works best for you. Is a 30-year, fixed rate the way to go? Would a 15-year note make more sense? "You have to decide up front, at the very beginning, which loan program works best for you,"writes David Reed President of CD Reed, Mortgage Bankers. "When loan officers can't compete on a particular loan program or they find they can make more money on another loan, they'll try to steer you away from your selected loan program. [But] you can't compare one loan against an entirely different loan when you're looking for the best rate. It is imperative that you truly compare apples and apples."

Second, shop around for the best mortgage. But be sure to look beyond the mortgage rate when comparing different lenders' programs. The lowest interest rate isn't always the best deal, so you have to read the fine print to understand true cost of the loan. "What good is 6 percent compared to 6.125 percent if the lower rate costs you several thousand dollars?" asks Reed. "Not much."

Finally, once you sign a contract on a house, lock in the rate as soon as you're comfortable with it. Don't wait to see if rates will drop, because there's a good chance that they'll go the other way.

The original article: What Every Homebuyer Should Know About Mortgage Rates in 2014 appeared on ImprovementCenter.com

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