As widely expected, the Federal Reserve announced “QE3” last week, a move taken to bolster the flagging economy by putting downward pressure on long-term interest rates.
More specifically, the Fed pledged to purchase even more agency mortgage-backed securities (MBS) in an effort to push mortgage rates lower than already are, via a method known as quantitative easing.
Their plan is to buy roughly $40 billion in MBS per month, with no set time period. In other words, it’s open-ended, which may have been unexpected.
And it will only come to an end when the economy and labor force have improved noticeably, and probably extend even further beyond that.
The Fed will also maintain an existing policy of reinvesting principal payments from its current agency debt and agency MBS in additional agency MBS.
Altogether, these latest actions will increase the Fed’s holdings of longer-term securities by about $85 billion each month through the end of 2012.
Just Tell Me How Much Rates Will Drop!
- As the Fed makes the pledge to buy more mortgage-backed securities
- Demand should rise, pushing MBS prices higher
- Which means lenders will be able to make more and offer lower rates to consumers
- Rates could drop .125% to .25% or more
Okay, okay, so what on earth does all that mean in layman terms? Well, with the Fed buying so many MBS, demand for them rises, prices rise, and the yield drops, and thus mortgage rates drop.
So the interest rate on your 30-year fixed mortgage goes down, though how much it will go down is the big unknown.
After QE3 was announced on Thursday, mortgage rates quickly sank back to record lows seen a month or so ago.
Unfortunately, mortgage rates have already fallen so much that the movement doesn’t mean a whole lot.
We could be talking anywhere from an eighth to a quarter point in rate, so instead of a rate of 3.625% on your mortgage, it might be 3.375%.
On a $200,000 loan amount, the difference in monthly payment is roughly $28. In other words, you can go to the movies or out to a modestly-priced dinner each month.
So before you get too excited, you may want to come to terms with the fact that it’s not going to change your life.
Granted, if you hold the mortgage for the full term, you’ll save about $10,000 in interest.
Rates Are Already Rock Bottom
- The problem is that rates are already super low
- And the lower they go, the harder it is to push them lower
- So while perhaps a well-intentioned move by the Fed
- It might not have the desired effect, especially if lenders are too busy to bother lowering rates
I’ve said this time and time again. Mortgage rates are already so stinking low that there’s not much room to move any lower.
Yes, it’s possible that the 30-year fixed could dip into the 2% range if the economy takes another wrong turn. Or if Europe implodes. Or if something else unthinkable happens. Let’s not tempt fate.
But the lower mortgage rates are, the less upside there is of them getting any better. When rates are high, it’s easy for them to slip lower and lower.
However, once rates drop considerably, as they already have, it’s probably safe to expect only modest improvements, if that.
That’s pretty much what we’ve seen over the past year and change, modest improvements after much more sizable declines.
So perhaps it’s best to look at the Fed announcement more as a preemptive move to avoid a rise in rates.
In effect, QE3 might mean low mortgage rates for a longer period of time, despite improvements in the broader economy that normally dictate their direction.
After all, mortgage rates had risen a bit over the past month, and the new G-fee has also made mortgages more expensive.
This effectively puts rates back to their most recent lows. Anything beyond that is still a big question mark.
And even if they did drop any lower, I don’t know if it would have much of an effect.
Mortgage lenders are already swamped with refinance applications, and those looking to purchase a home certainly are not holding back because mortgage rates are too high!