Mortgage Rates Break New Records – How Low Can They Go?

by Darwin on October 7, 2010

Today, the benchmark 30 Year conventional rate fell to a fresh low of 4.27%, down from 4.32% last week.  Meanwhile the 15 Year rate was down to 3.72% from 3.75% last week.  This data comes from Freddie Mac each Thursday and the averages include points, usually in the 0.6-0.7 point range.

What’s Driving These Insanely Low Rates?

  • Anticipation of a new round of Quantitative Easing -  We can thank the first round of easing for the current low rates and now there’s talk of another substantial easing measure perhaps in the $500 Million to $1 Billion range.  The question is whether this large measure is already baked into rates at the moment or if there’s more to go once announced.
  • Deflation – Many are now more fearful of deflation as opposed to inflation, so rates are anticipated to drop even further and stay low for a while.
  • Political Pressure to Maintain Low Interest Rates – With very little evidence of the economy recovering and housing stagnant, there are significant drivers for sitting politicians to throw everything at the situation, namely, low rates.  Low rates allow consumers to refinance and buy homes with lower monthly payments, thus freeing up cash to be spent elsewhere in the economy.

How Much Further Could They Go?

  • It Depends on QE2 – Some economists are pegging the drop in the 10 Year Treasury at about 4 basis points per $100 Billion in quantitative easing.  With a massive $1 Billion program, you’re talking 40 bps max.  Since the 30 year conventional mortgage rate follows what the 10 Year Treasury does with some success (not perfectly), it might be reasonable to assume you could see the 10 Year at 2.0% and a 30 Year Conventional Mortgage at about 3.875% in a best case scenario.

This includes lots of assumptions and getting below 4.0% on a 30 year mortgage may never happen.  So, if you’re in a position to buy or refinance now, it’s risky waiting around for something better.  After all, you could always refi if it’s that compelling later.  But you may end up missing the rate lock of a lifetime if the government announcement on QE2 never comes and interest rates spike in disappointment.

Can You Get a Better Rate?

Of course!  These are averages, so they incorporate the whole span of credit risk.  If you have a great credit score (find out your FICO Score Free), you may very well be 1/8 to 1/4 point BELOW the average and that’s with NO POINTS.  At least, that’s what I’ve found for my quotes.  You can get a quick quote by comparison shopping via this mortgage rate table.

{ 2 comments… read them below or add one }

Financial Samurai October 7, 2010 at 8:14 pm

Tip #1: Buy all the real assets you can i.e. property!

Thank you very much and thank me when you are loaded in 20 years b/c of your purchases!


Darwin October 7, 2010 at 9:42 pm

One of the big reasons we’d been considering trading up. It’s a contrarian move and people are freaking out, but we may see some hardcore inflation 5 years out.


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