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What are mortgage rates expected to do in 2014?

To understand where rates may be going, it is first important to understand where rates have been. Freddie Mac began tracking interest rates in 1971. During that time interest rates have fluctuated from 7.38% in 1972 to its high point of 16.63% in 1981, all the way down to the historical lows that we saw in 2012 at just 3.66%.

Can you imagine trying to buy a home at a rate of almost 17%? That would mean the mortgage payment on a $200,000 loan would be around $2,800 a month. In contrast, a $200,000 loan with an interest rate of 3.66% gives you a monthly payment of around $900. It’s easy to see why so many people speculate that these historical interest rates will not last forever. Most economists and financial experts seem to agree that rates will rise in the coming years, but not all of them agree on the reasons, or the speed at which the rates will climb.

Frank Nothaft, the vice president and chief economist at Freddie Mac, announced in December 2013 his prediction for where interest rates will go in the year 2014. Nothaft focused on housing affordability, stating that he believes a strengthened economy will create more jobs and greater income, which will lead to more affordability. He believes that affordability will continue, even though he predicts interest rates - which are currently at 4.5% - will climb to 5% by the end of the year.

Glenn Somerville, an associate editor at Kiplinger’s, wrote in his Dec 2013 article that he believes rates for 30-year mortgages climb to between 5% and 5.5% this year. He bases his projection on the Federal Reserve’s announcement that they will not raise rates until they see a substantial decrease in the unemployment rate.

The Mortgage Brokers Association predicts that interest rates will rise to 5.1% by the end of 2014, but will average 4.9% for the year. One of the contributing factors cited in their forecast commentary published on Dec 23rd, was the reduction by the FOMC of monthly purchases of both treasuries and mortgage backed securities by $5 billion each.

Its seems likely that interest rates will be on the rise for the next year or two, but will climb at a slow pace as our fragile economy strengthens and unemployment numbers slowly decline. However, like most things, you have to take a step back and see the history of interest rates as a whole to appreciate where we are.

Even if interest rates do climb up into the 5% to 5.5% range, historically speaking that is still an incredibly low interest rate. As a matter of fact, interest rates under 6% had never been heard of prior to 2003. Also, given that real estate prices have come down substantially from their peak in 2008, and seem to now be on the rebound, it could be arguably stated that this may be the best time to get a mortgage on a new home we have seen in our nation’s history.