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Interest Rates Balloon! Up, Up and Away?

News Update: Mortgage Rates have increased from 4.71 to 5.14 in 4 weeks.

Picture1As Steve Harney has said, the cost of a home has two major components: the price and the expense of the financing. Unless you are paying cash for the house, the mortgage interest rate is a key determining factor in what the home will cost you over the term of the loan.

The government has been keeping interest rates down for over a year. The programs that they used to accomplish this will be coming to an end on March 30, 2010. Rates are expected to rise quickly and dramatically after that.

Here is what the experts are predicting:

HSH & Associates’ 2010 Outlook:

Broadly, we expect interest rates to be lowest in the early part of the year, as support programs remain fully in force, with 30-year fixed-rate mortgages hanging around the 5% mark during the first quarter. After that we’ll start a transitional period, and for planning purposes, borrowers should expect figures one-half to even a full percentage point higher than this. ..With continued economic healing expected, pressure will build for the Fed to list rates and/or begin to remove supports, and, absent any resumption of these programs, rates will nudge closer to 6% than 5% for the final two quarters of 2010.

CNBC.com article 12/22/09

“If you told me by the end of 2010 a 30-year rate was at 6 percent that sounds about right” says Mark Zandi, chief economist at Moody’s. “I don’t think there’s any question rates are headed up.”

“The ending of the Fed program will definitely affect rates,” says Mark Goldman, professor of real estate at San Diego State University. “So far, the Fed has not expressed interest in keeping the program going. That could raise rates by some 150-200 basis points.” (which equates to 6 ½ to 7% rates).

Washington Post article 12/26/09

After hitting an all-time low in early December, the average rate on a 30-year, fixed-rate mortgage rose to 5.05 percent this week and could climb to 6 percent by the end of 2010, if not sooner, according to giant mortgage financier Freddie Mac.

Barry Habib 12/24/09 in his Outlook for 2010

We’ve been forecasting rates for a long time, and this is by far the easiest call we have ever had.  Rates are going higher in 2010.  We do not think that the low rates seen during 2009 will be seen again… Once the Fed’s Mortgage Backed Security buying program has expired at the end of March, it is likely that rates will edge higher still towards the summer… The range for rates during 2010 is wide, with the lower end just above 5% toward the very beginning of the year.  The upper end of the range could be as high as 6.5%, with rates being very volatile throughout.  It is typical to see prices worsen more rapidly than they improve…but 2010 will exaggerate that characteristic, with pricing losses coming far more quickly and sharply than pricing improvements.

Bloomberg article 12/28/09

“Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

The experts are saying rates will be somewhere between 6-8% by the end of 2010. This is why, even though prices are still receding, a person should consider buying now instead of waiting and trying to time the bottom of the housing market.

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