Mortgage rates at record low

As I have blogged previously, mortgage interest rates are being held down for now by Fed purchases of mortgage-backed securities.  That government-subsidized demand is holding bond prices up, and yields low.  The average 30-year mortgage was priced yesterday at 4.71% — truly incredible!

As I have also written previously, the Fed’s budget for these purchases is scheduled to end in March 2010.  Unless that budget is expanded and extended, one of two things is very likely to happen in April:  (1) independent, objective, investors will establish the value of those securities — pushing prices down and yields (i.e., interest rates) up, or (2) fewer mortgage-backed securities will be purchased at auction, meaning less money will be available for new mortgages — limiting the supply of loans at the same time the end of the extended/expanded homebuyer tax credit is pushing demand to a peak, which will in turn exert upward pressure on mortgage interest rates.

Based on available economic evidence at this point, mortage rate increases next Spring are inevitable.  An increase from 4.71% to 6% will raise the P&I payment on a $200,000 loan about $150 per month.  That’s significant in the $1,100/month range, especially when underwriting guidelines now limit debt-to-income to 45% instead of the 55% ratio we have used this year.

Low seasonal prices, low interest rates (f0r now), and tax incentives (ending in April) — now is the time to make your move.