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Low rates nearing extinction?

There are signs that the low mortgage rates that have lasted longer than anything seen in recent history will rise in the near future. You may wonder what the potential cost from increased rates might be and why rates may increase soon.

A 2 percent increase in interest rates, from 4.875 percent to 6.875 percent on a 30-year, $150,000 mortgage could cost a homeowner an additional $69,000 in interest over the life of the loan and almost $200 increase in monthly payments.

Why might rates increase soon? There are two separate Federal Reserve actions that have contributed to the artificially low mortgage rates, but can not last indefinitely.

The first is the setting of the benchmark Fed fund rate; this is the interest rate that banks and lending institutions pay to borrow money from the federal government. At the last Fed meeting in December, the board elected to leave this rate unchanged at the record low of 0 percent. The board has been criticized for creating rates too low that many believe is a primary factor in the housing bubble and subsequent crisis. Ben Bernanke, current Federal Reserve president, has denied the cause and effect role in our recent financial crisis; however, there is no denying the role they have had in keeping the mortgage rates at record lows.

The other contributing Fed policy — buying more than $1.25 trillion of mortgage-backed securities issued by the housing-finance companies owned by the federal government — enacted to combat the financial crisis has had an even greater impact on recent mortgage interest rates. By buying these securities issued by Fannie-Mae, Freddie-Mac and Ginny-Mae, the Fed has attempted to provide liquidity in a stagnant secondary mortgage market, hold interest rates low, and ultimately revive the housing market by luring potential homebuyers back. This tremendous mortgage-backed security purchase is scheduled to end after the first quarter of 2010. While there is talk of the Fed continuing this purchasing policy, there are others in the Fed pushing for an exit strategy citing perceived areas of strength in the economy.

What this means to the average consumer is when this Fed purchase policy is finally over, the interest rates in the mortgage backed securities market will rise to attract new investors thus increasing interest rates on new mortgages issued.

For those who have thought about refinancing or purchasing a new home, this could be your last chance to lock in a long term interest rate that could save you thousands of dollars over the life of your loan. This environment of low rates, coupled with the tax credit of $8,000 for first-time homebuyers and $6,500 for existing home owners scheduled to end April 1 of this year, makes this a crucial time to act.

Brian McMahon, a licensed mortgage broker, can be reached at (941) 720-2573 or brian@custom-mortgage.biz.

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