On August 9th, 2011 the Federal Reserve made the unprecedented move by announcing that interest rates, already at historic lows, will remain that way until mid 2013. The stock market responded positively by soaring 429 points.
Interest rates have been at historically low levels for years and with the sluggish economy it wasn’t likely that interest rates would increase much, if at all, for fear of slowing down the economy and consumer confidence. The Federal Reserve’s announcement that interest rates will remain low for the next year and a half really doesn’t change anything except to remove any expediency in the buying process.
This may seem like great news on the surface but what do guaranteed low interest rates for the next year an a half really mean, especially to buyers looking to purchase a home?
If you are able to qualify for a mortgage and have job security it means now is a great time to lock in on a mortgage and buy a home. The problem is that lending rules have become more strict in the past few years while job security remains somewhat unstable.
While now may be a great time to get a new mortgage economists warn that consumers need to look at the big picture when applying for a new mortgage. In other words, just because interest rates are low doesn’t mean one should run out and get a loan. Consumers need to consider their job security, the fragile economy and financial goals of the future.
In an article by Kathy Glass for for Fox Business:
“I certainly wouldn’t be basing my decision to buy a car, a house, or take out a loan because interest rates are going to stay low for a couple of years,” said Erik Carter, a certified financial planner with Financial Finesse, a Los Angeles-based financial education firm. “Really, it’s about focusing on your goals, focusing on the fundamentals and not being distracted by what the Fed is saying today.”
Carter said if it makes sense for you to buy a car, consolidate student-loan debt, or refinance your mortgage, now is as good a time as any with these historic rates, but major spending decisions should be made based upon your current financial picture, not the federal funds rate.
The fact that we know rates will be low for the near future is a positive thing for consumers who are looking to buy a home or refinance, according to Paul Bishop, vice president of research for the National Association of Realtors. He continued to explain that fear of rising mortgage rates is not really the primary concern weighing on borrowers. For most consumers, it’s high lending standards, not interest rates, that are holding them back.
“It’s really the availability of mortgages at this point that is a problem for consumers,” Bishop said. “Underwriting standards are fairly strict and are likely to remain that way for some time.”
Still, knowing we will see two more years of low interest rates is not a bad thing for prospective home buyers, who can work to improve their credit without feeling they might miss out on an historic deal. For those with good credit, Bishop reiterates that it is tough to beat flat housing prices and rock-bottom interest rates, if you are considering the purchase a home.
The announcement by the fed to keep interest rates low for the next year and a half is a good thing for those who are thinking about taking out a mortgage in the next year. Even if they don’t qualify today there is time to get their credit in order so they can take advantage of low rates. However, the fact that the federal reserve has guaranteed rates won’t rise anytime soon is an indication that they believe the economy will continue on a slow recovery path. Knowing that interest rates will remain low for a set amount of time allows consumers the ability to consider their purchases wisely by taking the time to think everything through. On the other hand, if your ducks are in a row there couldn’t be a better time to take out a new mortgage since housing prices are also lower than they have been in years.