Everyone would like to see into the future about interest rates. It would make the decision to refinance now or later an easy one, right?
We don’t have a crystal ball, but we can make a few educated guesses about where HARP 2.0 rates will be in 2014. Over 2.8 million people have taken advantage of HARP to date, but will interest cooperate enough to make HARP 2.0 (or even HARP 3.0 if it ever passes) a viable program in ’14?
There are a few things that give us a general idea about the future of rates for the HARP 2.0 program. The first consideration is where we are today. The most recent weekly mortgage survey as conducted by Freddie Mac showed 30 year mortgage rates averaged 4.32 percent as recently as September 26. This rate is a bit higher than the record lows we experienced earlier this year when rates hit 3.34 percent in January 2013.
Steady to Higher Interest Rates in the Near Term
Let’s look first at the near term. The Fed’s current quantitative easing program, called QE3, is expected to be around at least into next year. The Fed buys $85 billion each month in mortgage backed securities and Treasury bonds. This action helps keep interest rates artificially low. Once the Fed halts the program, the demand for those securities will soften and the result will be higher rates.
For now, in light of recent Fed comments, that stopping the QE3 program in full is not yet on the table. But, the Fed has mentioned “tapering” the program, meaning a slow and steady pullback as the economy improves. How much and how fast the Fed pulls out of the program will determine how high rates go.
Related: Complete 2013 HARP Guidelines
But since the economy is still struggling, the Fed most likely will make very slow movements, and interest rates should remain at or near current levels into the first part of 2014 – if we remain on the current trajectory of economic improvement.
After that? The economy is eventually going to grow at a more brisk pace at some point. If the unemployment rate continues to fall and the Fed sees definite signs of improvement in the economy, it’s likely the Fed will slowly ease back their buying habits and allow rates to gradually increase next year.
Watch the Unemployment Rate in 2014
One benchmark the Fed has given is that when the unemployment rate reaches 6.5 percent, we could see some pull back of QE3. Unemployment is now at 7.3 percent. If you see the unemployment rate creep toward 6.5 percent, watch for investors to get jittery and start selling mortgage backed securities in advance of a QE3 pullback.
It’s probably a wise rule of thumb to say that the closer we get to 6.5 percent unemployment, the higher rates will go. It sounds strange, but even talk of Fed “tapering” puts investors on edge and markets in turmoil.
How High could HARP 2.0 Interest Rates be in 2014?
So how high could mortgage interest rates go? They could approach 5.00 to 5.50 percent in 2014 if the Fed pulls out of its QE3 program. Why that number? It’s closer to historical averages in the past when economic conditions were similar to today’s. We can examine what interest rates were like when the economy was sluggish, and when the Fed was not buying mortgage backed securities and Treasury bonds.
In 2003, the average rate was 5.83% according to Freddie Mac’s interest rate survey. The U.S. was just coming out of the 2001-2002 recession, albeit a more mild one. And, the Fed was not yet buying mortgage backed securities.
In 2009, the economy was anemic to say the least, and the Fed had just started its quantitative easing program. Rates fluctuated between 4.81 and 5.42 that year.
If the economy continues on a mild recovery, but is still fairly weak, and the Fed eases up on its QE3 program, it’s reasonable to guess that we’ll see similar interest rates as in past periods.
Rates in the mid 5 percent range are a significant bump up from today’s levels. Someone who is eligible for the HARP 2.0 loan today but is waiting for rates to move lower should think about locking. There’s more risk at this point that rates will rise. And since no one can see into the future, the prudent move is to lock in today’s HARP 2.0 rates.