Will mortgage rates be lower in 2013 than they are now?

Chrissy from Boise writes: “I keep hearing that mortgage rates are at ‘record lows’ right now. Actually, I think I’ve heard that about a dozen times in the last few months. Do you expect this trend to continue next year? Do you think mortgage rates will be lower in 2013 than they are now, or about the same?”

What’s a ‘Record Low’ Mortgage Rate?

Let me start by explaining the ‘record low’ phrase we’ve heard so much of lately. When the media talk about current mortgage rates, they are usually referring to the weekly survey published by Freddie Mac. Each week, Freddie Mac surveys about 125 lenders from across the United States to see what kinds of mortgage rates they are offering. They then publish the averaged numbers on their website. It’s known as the Primary Mortgage Market Survey (PMMS).

The survey includes four different types of loans: the 30-year fixed-rate mortgage (FRM), the 15-year FRM, the 5/1 ARM loan, and the 1-year ARM.

Freddie Mac has been conducting their weekly survey since 1971. So when you hear about ‘record low’ mortgage rates, it means the lowest rate since the survey began in 1971. That’s why you’ve heard this phrase so much in recent months — rates keep dropping. For instance, on November 21 the average rate for a 30-year fixed loan hit 3.31%. That was the lowest average since 1971, so it was aptly referred to as a record low. If the 30-year FRM drops below 3.31% sometime in the future, it will be called a new record low.

What We Might See in 2013

Your primary question is harder to answer. Obviously, no one can predict the future with complete accuracy. But we can make educated guesses based on current market conditions. Many have predicted a continuation of the status quo, with mortgage rates hovering below 4% for much of 2013.

Ben Bernanke and QE3
Fed chairman Ben Bernanke announces QE3

The Federal Reserve is the usual justification for such predictions. Back in February, the Fed announced it would expand its purchase of mortgage-backed securities (MBS), to the tune of $40 billion. It’s part of their latest round of quantitative easing, known as QE3. They’re also planning to keep the federal funds rate near zero through 2015.

The broadened acquisition of MBS, in particular, could help keep rates low in 2013. According to Fed chairman Ben Bernanke:

“Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.”

If any one person is qualified to make predictions about lending rates, it’s the chairman of the Federal Reserve.

Here’s another well-informed outlook. Each month, Freddie Mac publishes an economic and housing market outlook that includes the ‘benchmark’ 30-year fixed mortgage rate. Their annualized projection for 2013 is slightly lower than the averages we saw in 2012. They have predicted 30-year FRM averages in the 3.4% – 3.5% range for the first half of the year. That’s where we’ve been for the last six months. So 2013 could look a lot like 2012, as far as mortgage rates go.

In October, the Mortgage Bankers Association (MBA) offered some predictions that were in line with those presented above. They expect the 30-year benchmark rate to “stay below 4 percent through the middle of 2013,” largely due to the Fed’s ongoing purchases of MBS.

You’ll find our own forecast on this page.

Lowest Rates Limited to ‘Elite’ Borrowers

The bottom line is this. Mortgage rates will probably remain at historic lows through at least the first half of 2013. But only the most well-qualified borrowers will qualify for them. This may come as a rude awakening to many borrowers.

There is a common misconception that anyone can qualify for the lowest mortgage rates. In truth, there’s no guarantee you can qualify for a mortgage loan period — rates aside. Lenders have maintained more stringent guidelines since the housing market collapsed. They now require higher credit scores, less debt, and more documentation. The forthcoming qualified mortgage (QM) rules, expected in January, will make these higher standards the norm.

Rather than obsessing over interest rates, borrowers are better off focusing on the size of their monthly payments. After all, it’s the monthly payment that determines the affordability of the loan.