No one knows for sure but most market analysts believe they will most likely be higher than 2009. Why is this important? For most home buyers, maximizing their purchase power is very important. Interest rates are the biggest factor that determine affordability outside of loan amount. The other reason rates are important is loan payment is a part of the parameters for loan approval. There are times where a household can afford a certain loan payment but for some reason both borrowers cannot be on the loan. When this happens only one borrower’s income can be used on the loan application. This can cause the debt ratio calculations to be high. Starting in December of 2009, the debt ratio allowances for conforming loans will be lowered to a much more conservative level. If a future home buyer has determined that they are on the edge of qualifying for a home loan, they need to be aware that if they wait too long they will likely not qualify for a home loan in the next 6 months if many experts are correct. Another reason it is important to understand the probabilities of interest rates going up is the decision of choosing between an adjustable rate mortgage versus a fixed rate. Depending on a buyer’s plans for owning a particular home, choosing a higher fixed rate loan can make the most sense.

It is hard to imagine rates higher than 6.5% for a 30 year fixed since we have rates below this for about 6 years. Rates this low have become normal for many people but, they are not normal. Historical average rates for 30 year fixed are closer to 7.5% and have been much higher in the recent past. Again most experts think we are heading toward rates that are closer to historical averages or higher. When and if that happens remains to be seen but there are good reasons for this opinion.

In order to make the case it will help to understand what makes interest rates move and what has made them as low as they have been for the last number of years. Interest rates are determined by a market that trades billions of dollars a day. If is a part of the bond markets called Mortgage Backed Securities. Investors buy and sell these bonds as part of their portfolios. There are a number of different coupon rates that investors can buy and sell. When there is a large demand for these bonds the price goes up which causes the yield, or interest rate, to go down. Thus rates available to borrowers go down. What causes demand for bonds to go up? This will be a very simplistic explanation but will help give a basic understanding of why interest rates are likely to go up. The purchasing of bonds is considered a ‘flight to safety’. Investors buy bonds when they think that potentially more profitable investments are too risky. The more risky options are usually in the stock market. When investors perceive there is too much risk in stocks or that there is not enough potential reward to be invested there, they will move money out of stocks and in to the bond markets. This movement of money causes an increase in demand for bonds which drives up the costs and lowers rates. This is primarily what drove interest rates down rates starting in 2001. The ‘Dot Bomb’ fall in the stock market caused large amounts of money to flow out of the stock markets. That large amount of money was looking for a home. Bonds were a safe place to earn a return while the stock markets struggled. They were not a bad investment either as the subsequent large movement in bond prices gave investors a profit potential in momentum trade. When investors abandon bonds for other opportunities it causes rates to go up. What causes investors to sell bonds? This usually happens when there is a perception that more money can be made elsewhere. This could be a stock market rally or an opportunity in commodities such as oil. The other factor that causes investors to sell bonds is the threat of inflation. Inflation degrades the value of the more fixed rate investments such as bonds. We have had the benefit of very low inflation until the oil prices spiked in 2008. During that time interest rates moved higher than they had been in 5 years. Spiking oil prices causes a great concern about inflation and the market responded accordingly. The other thing that will cause rates to go up is a perception that bonds are not the safe investment which is their primary appeal. With the recent increase in mortgage defaults in 2008 the perception that mortgage bonds were very safe began to suffer. This was another reason that rates went up in 2008.

One other factor that has created lower interest rates in 2009 was an unprecedented commitment by the US government to support the Real Estate market recovery. In an effort to create market activity the government decided to influence the markets to lower interest rates. They essentially became a huge investor in mortgage backed securities. The US Treasury committed to buy $1.25 trillion in mortgage backed securities. When they announced the program in late 2008 interest rates went from about 6.5% to 4.75% in a couple months. The demand created by this purchasing plan encouraged participation by the private market as well.

So, with all this in mind, why would experts say that interest rates will go up in 2010? First factor is it seems there is a consensus that we will not have a total melt down in the economy. This has been good news for the stock markets which lost almost 50% of their values by March of 09. The stock markets have gained about half of what they lost. There is reason to believe that the markets will stabilize and offer returns moving forward. This has encouraged investors to venture back in to the stock markets and move away from the safety of bonds.The other reason is there is a very large concern that inflation will become a big issue in the next few years. Inflation is caused by the devaluing of the US Dollar. One of he main factors in lowering the value of the dollar is the sheer amount of US Dollars in circulation. The US Government’s plan to stimulate the economy has created an unprecedented amount of Government borrowing and spending. It has diluted the supply of dollars in circulation. It has caused the price of oil to go up which always creates a concern about inflation. Concerns about inflation cause a movement away from bond investments. One of the main causes of concern of rate increases is that US Government activity that helped lower interest rates is scheduled to end after the first quarter of 2010. So far the government has spent about $960 billion of the scheduled $1.25 trillion committed to help lower interest rates. To make the money last longer the rate of purchasing mortgage backed securities has been cut in half.

Rates could stay relatively good for some time but it seems reasonable to expect rates to increase to a level at least close to where they were at the end of 2008. This would put us in the 6.5% range for 30 year fixed. If inflation becomes as big an issue that many believe it will, rates will be much higher. Rates were higher than 10% the last time the US had very high inflation rates.

It is important to discuss your loan options with a lender that understands these market trends.