The Federal Reserve announced today that it will begin the long-awaited slow withdrawal from its mortgage rate reduction program in January 2013.
The program, called Quantitative Easing, or QE3, has kept mortgage rates low since the end of 2011. The Fed has been purchasing $85 billion per month in mortgage backed securities and Treasuries.
The Federal Open Market Committee, or FOMC, decided today that the Fed’s buying will be at a pace of $75 billion per month starting in January, with more possible reductions through 2014.
The Fed has seen an improving economy, a lower unemployment rate, and hundreds of thousands of new jobs created in the past months. So, the economic stimulus that was meant to pump energy into the economy will not be as necessary in 2014. At least that’s what the Fed’s actions today indicate.
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What does that mean for mortgage rates? Interest rates jumped today in reaction to the news, but not as much as one might think.
Thirty-year fixed mortgage interest rates are still hovering in the mid 4% range for well-qualified buyers and those looking to refinance.
The reason rates didn’t make a wild jump is that investors have been prepared for tapering for most of 2013. The news did not come as a surprise. Higher rates in recent months already reflect the impending reduction of QE3.
Most huge interest rate swings happen when an unexpected piece of news hits investors. That was not the case this time.
In addition to the QE3 announcement, the Fed also announced that it will keep short term interest rates at or near zero until the unemployment rate falls below 6.5%. It currently stands at 7.0%.
This is good news for anyone with a home equity line of credit, or HELOC, which is based on the prime rate. Prime rate will stay low – around 3.0% to 3.5% – as long as short term interest rates stay low.
Because the Fed will continue to taper QE3 in 2014, those looking to refinance or buy a property should lock in a rate as soon as possible. This tapering announcement did not affect rates too badly, but the next one might. If the economy starts improving more rapidly than expected, we could see rates jump significantly. Homeowners who locked in at today’s levels will be glad they did.