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Will Mortgage Rates Drop on Fed News?

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Economists have been expecting the Federal Reserve to reduce its economic stimulus measures, so they were surprised when the Fed announced Wednesday that it would continue its monthly purchase of $85 billion in Treasury bonds. Following the announcement, mortgage rates dipped to a five-week low.

In a statement, the Fed said it wanted more evidence that the economy will continue to improve once it scales back its quantitative easing. Previously, Fed Chairman Ben Bernanke had said bond purchases would end when the unemployment rate drops to about 7%. Unemployment is at 7.3%, but the Fed decided not to taper.

Scott Sheldon, a Credit.com contributor and senior loan officer at Sonoma County Mortgages in California, said he expected rates to drop drastically after the announcement. While 30-year fixed mortgages fell to 4.5% from 4.57% last week, and 15-year fixed mortgages dropped to 3.54% from 3.59% for the same period, Sheldon says he had expected a bigger change.

“The only thing we can think of is that the lack of transparency from Bernanke and the Fed members have caused investors to distrust them and not park all their money in bonds,” Sheldon said as a possible explanation for the limited improvement in mortgage rates.

With that in mind, he doesn’t think the downward trend in mortgage rates will continue.

“Rates are going to continue to be volatile,” Sheldon said. “I think they’re probably going to continue to rise if not stay where they’re at.”

For consumers looking to buy or refinance, especially those sensitive to interest rates, it may be time to get moving. When it comes to buying a home, consumers should check their credit first and make sure everything is accurate, because a low score can impact your interest rate and the amount of home you can afford.

Sheldon said continued improvement of mortgage rates is only likely if the Fed continues to show unease with the economic growth or if the unemployment rate rises. Those possibilities aside, mortgage rates are more likely to rise.

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