Low Mortgage Rates may not Last Long

By Tom Kerr

Mortgage rates have hit a 50-year low, but many economists warn that low interest rate loans may not be here for long. With the Federal Reserve and Treasury spending freely to save the economy, inflation may put an end to inexpensive mortgage rates before the end of the year.

The Federal Reserve has been injecting billions of dollars into the mortgage markets in an effort to lower mortgage rates, thaw credit channels, and stimulate the economy through increased consumer spending. In addition, the Fed has cut key interest rates to a level that's virtually zero. During normal economic cycles, a fraction of a point decline in rates will usually translate into more affordable mortgage rates. And while loans are getting cheaper, they're nowhere near levels that should typically correspond with cuts to zero at the Federal Reserve. In fact, some economists predict that mortgage rates will soon start to go up instead of down.

Inflation and mortgage rates

The biggest concern regarding higher mortgage rates is economic inflation, a condition that's exacerbated by government debt and weakness of the dollar. When the Federal Reserve cut rates to their lowest possible level, it immediately triggered inflationary worries. On top of that, the Treasury has been spending unprecedented amounts of money to attack a failed economy. About $3 trillion, for example, has already gone out the door in the form of stimulus packages and rescue plans.

Meanwhile, despite the fact that the federal budget was balanced 10 years ago, the government is running a deficit that could rise to the multi-trillion dollar level this year, while tax revenues to support government expenses are falling due to a huge surge in unemployment.

Rising mortgage rates

None of those factors contribute to strengthening investor confidence in the U.S. In order to lure investment money into this economic climate, it's necessary to offer higher rates of return to offset the perceived risk of throwing good money into a bad economy. That's done by raising interest rates, and it's almost certain that they'll go up significantly within the next few months because of this perfect storm of contributing negative influences. This includes mortgage rates, as well.

Moody's Economy, for instance, forecasts rates of just under 4.5 percent by late summer. But in the last half of the year, they expect to see them climb back up in excess of five percent. By the beginning of 2010, mortgage rates could be gaining ground and approaching the 6 percent level.

For that reason, people who are thinking of taking out a mortgage or doing a refinance may want to act swiftly. If rates go higher in the middle of a severe recession, lenders won't be offering mortgages to customers who don't have excellent credit and vast assets and income. The last chance to capture bargain rates may be now. As the saying goes, those who snooze may lose.