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Mortgages stay low, but probably not for long

Polyana da Costa

Mortgage rates have stayed down after reaching a four-month low last week, as investors kept their eyes on the Federal Reserve.

30 year fixed rate mortgage 3 month trend

But don't get used to the trend. The rate on the most popular type of loan is expected to march to 5 percent next year and the volume of loans from homeowners refinancing their loans could drop by more than 50 percent, according to a forecast released by the Mortgage Bankers Association this week.

The benchmark 30-year fixed-rate mortgage was 4.27 percent, same as last week, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, that rate stood at 3.57 percent. Four weeks ago, it was 4.41 percent.

The benchmark 15-year fixed-rate mortgage rose to 3.38 percent from 3.37 percent last week, and the benchmark 5/1 adjustable-rate mortgage fell to 3.26 percent from 3.27 percent. The benchmark 30-year fixed-rate jumbo fell to 4.35 percent from 4.38 percent.

Weekly national mortgage survey

Results of Bankrate.com's Oct. 30, 2013, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed 15-year fixed 5-year ARM
This week's rate: 4.27% 3.38% 3.26%
Change from last week: N/C +0.01 -0.01
Monthly payment: $813.63 $1,169.86 $719.00
Change from last week: N/C +$0.18 -$0.90

The 30-year fixed rate will likely average 4.6 percent in the first quarter of 2014 and climb to 5 percent by the third quarter, according to the MBA forecast. Mortgage rates might start rising when the Federal Reserve announces it will scale back on the bond-purchasing program that has long helped keep mortgage rates artificially low.

"At the end of the day it's really not sustainable to have mortgage financing at 3.5, 4 percent," says Mark Fleming, chief economist for Corelogic. "Rates have been subsidized in some way but that subsidy is being removed and the cost of financing housing will rise. We can't stay down at this level indefinitely."

The Fed will push mortgage rates up next year

The mere hint that the Fed was preparing to cut back on the stimulus program was enough to make rates spike over the summer. Mortgage rates climbed by more than a percentage point after Fed Chairman Ben Bernanke said in May that the central bank could slow the pace of bond purchases this year.

The Fed has held off on that plan because the economy hasn't performed as well as expected. The central bank will likely begin tapering the $85-billion-per-month stimulus program in early 2014, says Michael Fratantoni, MBA's vice president of single-family research. Rates won't jump another percentage point when the Fed announces the tapering, but they will rise, he says.

"It's the announcement that's going to have the most impact," he says. "When they actually start reducing the purchases we expect almost no impact on rates."

Once the Fed pulls back on the stimulus, rates could quickly rise back to where they were about two months ago, says Brian Koss, executive vice president for Mortgage Network in Danvers, Mass. In August, the 30-year fixed averaged 4.62 percent; in October, it averaged 4.35 percent.

Refinances dry up

As a result of higher interest rates, fewer homeowners will refinance their mortgages. The volume of refinance originations nationwide will drop to about $463 billion in 2014 from more than $1 trillion this year, according to the MBA forecast.

While the drastic reduction of refinances is bad news for banks, it may benefit homebuyers as lenders shift their focus to the purchase market, Fleming says.

"As refis go away and there's more demand on the purchase side, if you (as a lender) want to fill your capacity, there's more pressure now to expand that credit box," he says. "And the primary way to do it would be to relieve the credit score criteria a little bit."

Lenders may hesitate to loosen credit score requirements in early 2014 because of stricter mortgage regulations that go into effect in January. The rules created by the Consumer Financial Protection Bureau put more pressure on lenders to verify a borrower's ability to repay the loan. But eventually lenders will adapt to the new reality of the mortgage market, Fleming says.

The volume of loans to homebuyers will increase about 9 percent as home prices and sales continue their upward trend, the MBA predicts.

Borrowers should act now

If you are planning to get a mortgage to buy a home or think you could still save with a refinance, you should lock a rate as soon as you are comfortable with the numbers, Koss says.

"The volatility is so tremendous and you've gotten gains that weren't expected," he said of the recent decline in mortgage rates. "This is Christmas. Wrap the present and take it to your room.".

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