Funny Stuff is all around

Scary Rate Forecast

The American financial system is under pressure. The Federal Reserve is lowering prime interest rates, yet mortgage interest rate predictions are still shooting up – what’s going on? And what will it mean for American home owners?

mortgage interest rates predictions

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 set by the Fed affect the cost of funds to 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 Federal Government lowers prime interest rates, it therefore lowers borrowing costs for mortgage lenders – you would think that in that csse mortgage interest rate predictions would fall. However, banks and other lenders may choose not to pass on the reductions to home owners.

The reason is not profiteering – there is enough competition in the mortgage lending market to ensure that no one lender can profit unfairly. The motivation is that being a mortgage lender in today’s market is a whole lot more risky that it used to be, and perceived risk raises interest rates.

Lenders are charging everyone more interest to cover their losses on the few who will default on their mortgages.Until the falling housing market bottoms out, the lender’s risk will remain elevated, and mortgage rates predictions will stay high.

There is a limit to how much the Fed can lower interest rates, too. The quoted interest rate (called the “nominal” rate) includes an inflation factor. To calculate the “real” interest rate, we subtract the inflation rate from the nominal interest rate.

The thing is, when you do that just now, the result is a negative number! This means that nominal interest rates are not even high enough to keep up with inflation.

Clearly, this is a situation that cannot continue for long. At some point, the Federal Reserve will have to raise interest rates to at least break-even levels, matching the rate of inflation. This interest rate rise will definitely flow through in to mortgage interest rates.

What we are saying is that it’s really only a matter of time, and not much time, before mortgage rates rise again. The only way is up for the mortgage rates forecast.

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