Mortgage Rates Under 3%?
Ben Bernanke and the Federal Open Market Committee (FOMC) are meeting in Washington this week.
They’re saddled with the most unenviable of jobs. They’re trying to keep the economy afloat in a storm of negative economic data.
The problem is the Fed has already fired most of its ammunition.
They’ve lowered short term interest rates to 0%. They’re keeping interest rates low by buying Treasuries and mortgage backed securities. And they recently took an unprecedented step of telling everyone they’ll keep interest rates near 0% until at least mid-2013.
But it’s not enough…
The weak economy is defying the Fed’s wishes and stubbornly refuses to add jobs.
Now, all eyes are back on the Fed this week. Everyone is wondering what the Fed will do next to jump start the economy.
At this point, investors are expecting the Fed to do something. And Bernanke has been hinting that they will tweak their current asset purchase program.
It’s being called “Operation Twist”. A method of stimulus first used in 1961 and named after the popular dance.
In brief, the Fed will sell some of its debt maturing in less than three years and buy debt with seven to ten year maturities. The markets are anticipating the Fed will “twist” from $200 to $700 billion into this new program.
Operation Twist is intended to lower long term interest rates. And we’ve already seen the bond markets react to the news.
The result? Long term interest rates are falling…
Obviously, if interest rates are lower, the cost of borrowing money goes down. That means this move should benefit consumers and businesses alike.
And more importantly, it could jar the housing market out of its post-bubble slump.
Why?
Interest rates have never been this good before.
As you can see, mortgage rates have been falling steadily for years.
In fact, rates have fallen from 6.4% in July of 2008 to an all time low of 4.13%.
Consider this…
The monthly payment on a $200,000 30-year mortgage with a 6.4% interest rate is $1,251. But with an interest rate of 4.13%, the payment falls to just $970.
That’s an annual savings of $3,372!
And if the Fed’s “twist” drives interest rates down to 3%, the payment on our $200,000 mortgage falls to $843! In other words, lower interest rates could slice mortgage payments by a whopping 32% from 2008 levels.
Clearly, financing a house with a mortgage has never been cheaper.
What’s more, with interest rates this low, we might finally see enough buyers come into the market to spur new construction. And that’s just what the economy needs to spark a revival in growth.
At the very least, take a look into refinancing your own mortgage. Interest rates near 4% and moving toward 3% are just too good to pass up.
Category: Bonds
