Where Do Mortgage Rates Go From Here?

With the U.S. housing market showing signs of life for the first time since the financial crisis and mortgage rates still near historic lows, the coming spring homebuying season could be a busy one for sellers and buyers alike. But how long will rates stay low, and where should prospective borrowers be looking for clues as to where rates are headed? Keith Gumbinger, vice president of mortgage-tracking website HSH.com, monitors mortgage rates and offered his thoughts on the current environment. 

We've seen mortgage rates at historic lows for quite some time now. What's the outlook for the remainder of this year?
For planning purposes, it would be best to expect rates to be above record-low bottoms, as an improving economy will tend to lift them this year. Potential borrowers should expect 30-year fixed-rate mortgages to generally hold below 4% for most of the year, but we could flare above that if growth or inflation really step up. We will likely see the lowest rates before midyear as the economy is affected by the fiscal cliff tax and spending deals, so the traditional spring homebuying season should fare well.

Once rates do begin to rise, how quickly is this likely to happen? Could we see rates climb as much as 2 percentage points or more per year?
In January, mortgage rates moved off 2012 bottoms, moving more swiftly than they have in a while, but only rising by about a quarter-percentage point. With the Federal Reserve committed to keeping rates both low and stable, a huge swing in rates is unlikely. Although rates can be expected to rise somewhat, they remain tethered by the Fed and will tend to move at a measured pace when they do move. A 2-percentage-point move is highly unlikely, and the bottom-to-top move for rates in 2013 should total less than a full percentage point.

What external factors should rate-watchers keep an eye on to see what direction rates are headed? Will bond yields dictate this? And will the Fed's quantitative easing policy play a role?
Record-low rates are the result of a combination of a weak domestic economy, aggressive Federal Reserve policies, and, importantly, a strong flow of dollars from overseas as investors tried to get out of the way of crashing European economies. An improvement or change in any or all of these factors will tend to lift rates. We have already seen some of this in the early-2013 rally in global stock markets, fostered by firm growth in the United States and an improved outlook for European bank finances. Money is moving out of the safety of bonds, lifting yields and in turn pressing mortgage rates upward a bit.

Watching bond yields is a good idea, especially yields on 10-year Treasuries. However, there isn't a perfect relationship between those yields and mortgage rates, so watching for investor appetite for riskier investments, such as equities or even oil, can provide some clues as to the direction of rates, too.

National home-sales numbers have been more encouraging lately. Will this be the year we finally put the housing slump behind us?
A case can be made that we have turned the corner on housing. Homebuilding has climbed off its bottom. Sales of both new and existing homes have been solid for a number of months now, once-bloated inventory levels have shrunk, and prices are again on the rise. That said, the improvement is still uneven, and it will still be some time before all distressed homeowners and markets catch up. But we continue to move away from the depths of the housing crisis. Total new- and existing-home sales will probably rise another 5% or more over 2012 levels as the turnaround continues.

How much more difficult is it to get a mortgage today than it was, say, five years ago? What can applicants do to improve their odds of getting the best mortgage to meet their needs?
The good news is that underwriting standards are only somewhat tighter in 2013 than they were in 2008; the bad news is that those standards are still pretty stiff for most borrowers. To get access to the lowest rates, borrowers will need a credit score north of 740, a down payment of 10% or more, and the ability to fully document their income and assets. Having other debts well-in-hand will help, too. For some borrowers, such as those with sporadic or seasonal income streams, the challenge is greater.

For borrowers who can't get their score that high or amass a huge down payment, the Federal Housing Administration provides a viable alternative, but one where costs have risen and will rise further in 2013.

To ensure the best possible deal, borrowers should check out and clean up their credit reports and work to improve their credit scores, if need be. They should also get their financial documentation in order, have more than enough cash on hand to cover costs and contingencies in the transaction (such as an appraisal which comes back lower than expected), and have some patience for what will be a trying process. Being well-prepared and a little flexible will go a long way toward getting the loan you need.

Are any particular types of mortgages better bargains than others at the moment? For example, is there any sense in taking an adjustable-rate mortgage right now with rates on fixed mortgages so low?
Fixed-rate mortgages remain the best overall idea for most homebuyers. Homeowners who are refinancing should pay attention to shorter-term fixed-rate loans, with 20-year and 15-year terms offering great savings. Yes, there can be value in ARMs for certain homeowners or homebuyers, including first-timers and those preparing for downsizing or retirement, but those opportunities do carry risks of rising rates in the future.

Before selecting a product or term, a mortgage borrower should have an idea of how they will need this product to perform over a time horizon, a concept not much different than planning an investment strategy. Matching a fixed-rate period of a mortgage to a known time period can yield savings; remaining beyond that time period can bring risks of higher costs. For example, a borrower with a five-year period before retirement, with plans to relocate, might refinance into a five-year hybrid ARM and be able to bank tremendous savings. But if the five-year plan turns into six, or seven, all those savings could be wiped out, and resulting higher interest rates could cause financial duress should they persist. Careful planning and saving can ameliorate these risks, but only getting out of the loan at or before the end of the time period can eliminate them.