Higher mortgage rates for 2014? Count on it. Could this be the year to check out hybrid mortgages, which haven’t been popular lately? Maybe.
You can count on interest rates going higher because:
• The Federal Reserve intends to continue reducing its monthly purchases of mortgage bonds and Treasury securities, which will have the side effect of raising rates.
• The national economy finally appears to be picking up steam, based on the latest quarterly data. Higher growth rates in turn will increase demand for available credit and likely nudge rates higher.
• New federal regulations for mortgage lenders aimed at avoiding another bust take effect Jan. 10. Not only will loan officers and underwriters scrutinize applicants’ income, debt ratios and credit extra carefully, they’ll likely charge more for borrowers whom they see as a higher risk. Some mortgage economists predict that conventional 30-year fixed-rate loans could go to 5.5 percent before year-end.
So what does this mean for you if you’re thinking about buying a house or refinancing and you want to nail down the most favorable interest rate and terms? Should you shop primarily for a traditional mortgage product that guarantees you a specific rate for 15 to 30 years?
Or should you check out what’s also on the shelf in the way of hybrids – loans that provide you a guaranteed fixed rate for a predefined period of time, say five, seven or 10 years – then convert to a rate that can change annually?
The case for sticking with a traditional, fixed-rate mortgage is straightforward. Though 30-year rates are more than a percentage point higher this month than they were a year earlier, they are still not far off multidecade lows. Bruce A. Calabrese, president of Equitable Mortgage Corp. in Columbus, Ohio, is adamant: “My advice for homebuyers” in the new year, he said, “is to lock [early] into a 30-year fixed” while rates are still under 5 percent. “Take a 30-year fixed at 4.75 percent and be happy” because that’s still far below average rates over the past several decades.
Paul Skeens, president of Colonial Mortgage Corp in Waldorf, Md., agrees. “If fixed [rates] are under 5.5 percent and you are going to live in your home for five years or more, they are still a great deal,” he said. “I’m very partial to fixed rates since I remember when anything under 7 percent was a great deal.”