Interest rates on mortgages are historically low, but we keep hearing that rates will be going up. Why? As of March 31, the Fed will stop purchasing mortgage backed securities (MBS). According to Marvin Goodfriend, formerly of the Federal Reserve Bank of Richmond, it’s an experiment. The Feds are hoping the economy is strong enough, and investors confident enough, that private money will come back into the the morgage market and mortgage rates will rise only slightly. If rates spike, the Fed reserves the right to step in buy more securites. The Morgage Bankers Association forecasts that rates could rise to 6.5% by the end of 2012.
How would this increase affect the average homebuyer? Check the chart at the left to see the effect of rate increases on a loan of $200,000. For a loan of $100,000, divide the payment by 2, and so on.