Mortgage Rates are Falling Up?

So the Federal Reserve dropped its rates that are charged to banks and you would expect that mortgage rates from those banks to consumers would drop as a result.  After all that is the pattern of cause and perceived effect that has taken place in the mortgage industry for about the last 16 years.

There are unfortunately two big problems that are actually causing mortgage interest rates to fall Up, as in rates are going up not down.

Freddie Mac, the mortgage company, reported Thursday that 30-year fixed-rate mortgages averaged 5.88 percent for the week ending April 3. That was up from last week’s 5.85 percent and was the highest since the middle of March, when 30-year rates stood at 6.13 percent.  ~ Associated Press

The first is that banks are finally starting to recognize the risk that their consumers bring to the table.  You may have good credit or even decent credit or maybe you have sketchy credit.  But the bank looks at a pool of borrowers, and right now at this moment in history foreclosures are rising in many areas.  Like a group of people trying to warm up a pool together, the risk that banks take on in aggregate is being heated up by the people already in the pool letting go of their mortgage obligation.  So the bank has to pay for that loss, and the only way they can do that is by reflecting the new rate of real risk in their mortgage rates.

Then there is an even bigger problem that is starting to hit banks albeit more slowly.  Its called inflation.  You can see it at the pump and you can see it at the store when you buy a gallon of milk for $5.75 a gallon(local Wal-Mart price last week off sale).  Banks have to set mortgage interest rates to cover the risk of the borrower and they have to set interest to cover the risk of inflation and the decline in value of the dollar.  Well guess what, inflation is slowly coming and the dollar is dropping in value.  That means if you borrow $200k today and pay back $200k tomorrow, the bank is going to lose a little money on the transaction.  Spread those payments out over a normal mortgage period and they will lose even more in the short to medium term.

So that has mortgage rates going up.  The trend of where this will fall out is anyone’s guess.  The Fed’s reductions normally can take 3-6 months to actually have a direct effect on the mortgage rates offered to consumers too.  So that means that the recent reductions the banks received may not show up in offers to you until July.  However, if the banks risk increases during the same time and inflation increases, then the Fed’s drop in rates may be completely consumed and you will not notice a positive move at all.  So if you were hoping to pay for some good vacation deals this year based on the money you would save on a lower mortgage rate, you might have to think again and instead find some ways to tighten up your belt buckle to ride this one out at home.

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