New Mortgage Interest Rates Prediction - Mortgage Rates To Rise Again
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The banking system in the USA is in crisis. The Fed is trying to keep interest rates low, yet mortgage interest rate predictions are still rising - how can this be? And what will it mean for American home owners?
The key concept home owners need to comprehend about interest rate predictions is the connection between the interest rates set by the Fed and the interest rates charged by mortgage lenders.
Interest rates determined by the Fed affect the cost of borrowings for mortgage lenders. Banks and other lenders don’t start out with all the money they lend out - they usually borrow on the wholesale market 90% of what they lend out to home owners, at rates lower than the mortgage rates they charge.
When the government lowers interest rates, it lowers the base costs for mortgage lenders, and in that case you would think that mortgage interest rate predictions would fall. However, financial institutions may decide not to pass on their savings to home owners.
The reason is not greed - there is enough competition in the mortgage market to ensure that no lender can profit unfairly. The reason is that being a mortgage lender just became a whole lot more risky, and risk raises interest rates.
Financial institutions are everyone more interest to compensate for their losses on the few who will miss payments on their mortgages. Until the housing market stabilises, default risk will remain high, and mortgage rate predictions will remain high.
There is a limit to how much the Fed can lower interest rates, too. The primary interest rate (called the “nominal” rate) includes inflation. To figure out the “real” interest rate, you need to subtract the rate of inflation from the nominal interest rate.
The thing is, when you do that just now, the result is a negative number! It’s a real anomaly - nominal interest rates are lower than the inflation rate.
Clearly, this is a situation that cannot continue for long. Soon the government will have to raise interest rates to at least break-even levels, matching the rate of inflation. As soon as it happens, the prime interest rate rise will flow through into mortgage interest rates.
In other words, it’s only a matter of a short time before mortgage rates rise again.
Mark Bennett is a staff writer for MoneyTalks.com, and contributes regularly to other financial sites.
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