Will Mortgage Rates Get Any Lower than they Are Now?

December 7, 2016

If you have been sitting on the fence, putting off buying a new home or refinancing your current one, thinking that interest rates might go lower, you might want to take action now. While it’s always possible that mortgage rates could get lower than they are now, it’s very unlikely.

There are several developments working out right now that support that conclusion.

The Presidential Election is Over

The Federal Reserve often keeps interest rates steady in election years to avoid influencing the outcome of the election. But the election is now over, and a major obstacle to movement on interest rates is now behind us.

The Fed has been under pressure to increase interest rates for the past couple of years. They have decided to postpone action, most recently because of the election, but that limitation is gone.

It’s been widely reported that the Fed is strongly considering raising rates in December. Recent activity in the bond market, at least since the election, is pointing toward higher long-term interest rates. That may make the Federal Reserve more likely to act on the upside than have been in recent years.

The Trump Presidency Could Lead to Higher Inflation

There’s been widespread speculation that a Trump presidency could lead to higher inflation, which would fuel higher interest rates. It was generally assumed that since Hillary Clinton represented the incumbent Democratic administration, that inflationary pressures would have been lower, making interest rate increases unlikely.

But Donald Trump has indicated his intent to reform the income tax system by implementing his own tax plan, which could lower taxes for individuals and businesses.

Since tax cuts put more money into the hands of both businesses and consumers, they are often seen as inflationary. More money in circulation means more economic activity, and that translates into higher prices. Higher prices put upward pressure on interest rates.

Rebuilding the infrastructure is another consideration. On the campaign trail, Trump indicated a strong interest in launching a nationwide program to rebuild infrastructure across the country. This includes roads, bridges, utility systems, airports, and seaports.

The rebuilding will result in spending many billions of dollars, which could put upward pressure on wages, building materials, and other supplies. In theory, all of that can lead to higher prices. It is also likely to increase the national debt, which by itself can put upward pressure on interest rates. And all of that combined could lead to higher mortgage rates.

The Federal Reserve Has Been Holding Off Hiking for Several Years

It’s also important to recognize that the Federal Reserve, while consistently indicating a need to normalize interest rates at higher levels, has been putting off that decision. Short-term interest rates were lowered to just above zero way back in 2008, where they’ve been ever since.

A relatively modest increase in short-term rates – perhaps just 2% or 3% – could move mortgage rates significantly higher.

For what it’s worth, the Fed works with short-term interest rates. They don’t have a direct correlation with mortgage rates, but the direction of short-term rates often does. As short-term rates rise (or fall), long-term rates often move in tandem. A general strategy of increasing short-term rates could lead to higher long-term rates and mortgage rates with them.

Mortgage Rates are at the Lowest Level in History

As short-term interest rates have stayed near zero, rates on 30-year mortgages have hovered between 3.something and 4.something percent for the past seven years. Those are the lowest mortgage rates in history, even going back to the dark days of the Great Depression.

It’s worth considering that the historical average for mortgage rates is actually 8.26%. This is substantially higher than the current prevailing rate of 3.something percent. Should mortgage rates simply go to their historic average, they would more than double from their current levels.

That Makes Now the Time to Buy or Refinance

What does all of this mean? If you’ve been waiting to buy or refinance a home for the past year or two, now would probably be an excellent time to take action.

When mortgage rates are at historic lows, there is a far greater likelihood that they will increase rather than decrease. And given the set of circumstances detailed above, some sort of increase is more than a slight possibility.

A delay now could result in you paying thousands of dollars more for your mortgage than you would if you applied and locked in your rate now.

Given all of that, what are you waiting for?

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