How low can mortgage rates go? A few short years ago, borrowers who were able to refinance in the mid to low 5% range thought they would never have to refinance again.
Little did anyone realize during the housing boom years that the subsequent crash in housing prices would result in mortgage rates lower than anyone could have imagined. In a desperate effort to lower mortgage payments and revive the housing market, the Federal Reserve engaged in a historic series of rate cuts which have brought mortgage rates to all time lows.
The chart below from chartoftheday.com shows the dramatic decline in interest rates since the early 1980’s. Note that interest rates remain in a downward channel suggesting that interest rates will continue to decline.
Lower rates may have stabilized housing prices but many borrowers are still struggling with high payments, housing prices have not rebounded and the economy seems to be sliding into another recession. Speaking this week before U.S. lawmakers, Federal Reserve Chairman acknowledged the fragile state of the U.S. economy and indicated that the Fed stood ready to act. Mr. Bernanke said “We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we’ve seen recently is enduring and whether or not the economy is likely to continue to make progress towards lower unemployment. If that does not occur, obviously we have to consider additional steps.”
In discussing what “additional steps” the Fed could take to stimulate the economy Mr. Bernanke indicated that the Fed could extend the period of time that it will keep short term interest rates low. In addition, the Fed could also continue to purchase long term treasury securities and mortgage-backed securities which would force long term mortgage rates lower.
The Fed Chairman did not commit to specific action but regardless of what specific action the Fed takes, lowering long term interest rates will be the primary objective. Lower long term borrowing rates will flow through to the mortgage market resulting in lower rates. Mr. Bernanke said the housing market has shown only “modest signs of improvement” despite the historic lows in mortgage rates.
According to Bernanke, many homeowners are unable to take advantage of lower mortgage rates due to poor credit or negative equity and potential home buyers worried about the future are postponing a home purchase. Given the great uncertainties over job security and the high rate of unemployment, many consumers are worried that they will experience a cut in income or perhaps even lose their job. The confidence necessary to purchase a home will not return until consumers are convinced that both the economy and the housing market are improving .
Unless the economy miraculously starts to boom, it is almost a certainty that mortgage rates will be lower by the end of the year. The current rate of about 3.5% on an FHA mortgage could easily decline to 2.75% or lower by year end. The Federal Reserve, which has been easing monetary policy since the financial crash of 2008, will continue to force interest rates lower in a desperate attempt to revive the economy.
Since the Federal Reserve has all but promised that they will continue to force mortgage rates lower, it makes sense to postpone a refinance at this time, especially after considering the high closing costs involved with refinancing. The savings from a mortgage refinance will vary depending on the amount of mortgage debt outstanding and the rate on the current mortgage, but if mortgage rates drop to 2.75% or lower, the savings will be compelling. For example, a homeowner with a $250,000 mortgage currently at 4% who refinances to 2.75% would drop the monthly payment by $173 for an annual savings of $2,076.