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The chance to refinance your mortgage at around 5%, or to enter a low-interest one, is going to end soon. The fewer than 5% interest rate is the lowest it has been for a long, long time. It is this low because of the recent recession-border-line-depression. The Fed wants to encourage spending and lending so it keeps its rate low. But this is rapidly changing. For example, during the week of January 7th, the average fixed-rate loan was at 5.09%. This is much higher than the 4.71% the average rate was just one month ago. Furthermore, with the economy showing signs of improvement, there are three main reasons the rate will undoubtedly go up.
First of all, the government program that kept rates as low as it has is coming to an end. The Federal Reserve has been buying up mortgage-backed securities since 2009. Throughout this program, the Fed has purchased over 1.25 trillion dollars worth of assets. This action has tempered rates by creating a market for these “toxic assets.” This program is slated to end on March 31. Then, the Fed will turn the market over to the private sector; they will certainly demand higher rates.
Second, the Treasury’s yield has gone up. A few weeks ago, the yield sat at 3.2% over 10 years, now it is at 3.84%. This represents a 20% rise. Mortgage rates are not directly related to Treasury yields, but the two have an historical tendency to mirror each other. Also, mortgage rates are always higher than Treasury yields because private investors demand a premium. Being virtually risk-free, the Treasury does not. Historically, the difference between mortgage rates and Treasury yields are around 1.7%. Right now, they are at 1.2%
Third, the economy is slowly showing signs of improvement. With these signs, businesses will expand production. This expanded production forces business to borrow more from lenders; therefore, the demand for lending will increase and interest rates will rise. Also, as the economy improves, stocks tend to do better on the market. This will force lenders to compete for stock investment by raising their rates to attract investors interested in maximizing their returns.
All three of these signs combined could cause the average 30-year rate to rise above 6% by the end of the year. And thus, a fall back to 5% is highly unlikely.