Federal National Mortgage Association (FNMA), FREDDIE MAC PFD Z (FMCKJ): 6% Mortgage Rates Could Come Sooner Than You Think

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Federal National Mortgage Association (OTCBB:FNMA) headquarters in Washington, D.C. Image source Wikimedia Commons, by Nick Anfinsen.

Will the government allow mortgage rates to rise further?
The recent hit to the bond market has led many to question just how much influence the Fed can exercise over long-term rates in the long run. Even the possibility of cutbacks on its bond-buying program was enough to send rates soaring, prompting several Fed officials to take issue publicly with what they saw as an overreaction in the bond market to the message that policymakers were trying to send. With the Fed continuing to buy bonds with particular attention to the mortgage-backed bonds that help keep mortgage rates low, it would take a complete loss of control from the Fed to allow mortgage rates to hit 6% in anything approaching the 2014 timeframe that a reversion to normal interest spreads would imply.

Still, given the government’s interest in keeping the economy growing, allowing a quick rise in mortgage rates to 6% would probably cause substantial collateral damage. Home prices that have risen by double-digit percentages over the past year would suddenly be in jeopardy of dropping, as monthly payments on a $250,000 mortgage would rose from around $1,125 at 3.5% to almost $1,500 at 6%, making homes much less affordable for many prospective borrowers. Homebuilders that have seen big recoveries in buying demand would suddenly see buying interest dry up, and the employment prospects for workers in the industry as well as those helping to provide related services would decline as well. That’s a downward spiral that the Fed can’t afford to allow to happen.

Be ready, but be patient
Eventually, a return of mortgage rates to more normal levels in the 6% range seems likely. But it will only happen once the economy shows signs of being able to withstand the pressures on economic growth that would come with such an increase. That doesn’t seem likely by next year, but it could come sooner than you think — and so being prepared and taking advantage of still-low rates while they last makes long-term financial sense.

The article 6% Mortgage Rates Could Come Sooner Than You Think originally appeared on Fool.com is written by Dan Caplinger.

Fool contributor Dan Caplinger owns warrants on Wells Fargo and (NYSE:WFC) Bank of America. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, and Wells Fargo.

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