What to Expect From Mortgage Rate Trends for 2010

By Mike


Since the major cut in the interest rate back in 2008, we haven’t heard much about the FED cranking up the intraday rate so far. However, with recent GDP stats (5.7% annualised rate for the last quarter), we will surely hear some whispered rumors about the prime interest rate going up.

What is the intraday interest rate?

The FED has control over the inter bank rate. This is the rate established for banks lending to each other for one day. At the end of every day, banks look at their balance sheet and borrow or lend money in order to balance their assets with their liabilities. These loans are for 24 hours since their balance sheet changes daily. This is why we have an intra day interest rate.

How does the intraday interest rate affect my personal finances?

So even if the intraday interest rate is being set for banks, it does have an important impact on your personal finance. In fact, the intraday rate is the basis for the determination of all mortgage rates. This will affect directly the variable mortgage rates and will have an eventual impact on fixed mortgage terms.

Since mortgage rates change along the intraday, it is the same thing with a line of credit and personal loans. When the intraday goes up, you can be assured that all interest rates on banking charts will go up. The good news is that if you don’t have any debt and you are looking for sure deposit options; high yield savings account and CDs will increase as well.

So if the FED talks about increasing the intraday interest rate, this will have a direct impact on your savings and debt.

Why can the intraday interest rate go up?

It is a fact that the US economy is far from running smoothly. The unemployment rate is over 10% and people that find themselves a new job are being underpaid compared to their previous position.

However, if the GDP keeps going up, inflation will surely come back sooner or later. Unfortunately, the best way to stop inflation is to increase the intraday interest rate. By doing so, all interest rates go up and this motivates (read: forces) consumers to spend less and concentrate on their mortgage loan and other debt. This is how the FED can slow down the consumption and inflation at the same time.

What will happen to my mortgage rate?

If you have a fixed rate, the change in the intraday rate won’t affect your payments. Your mortgage will continue as agreed in your contract.

However, if you are about to get a new mortgage, you will most certainly have worse lending conditions in 2011 than in 2010. A few weeks ago, the FED declared that they won’t touch the intraday rate for now. Even though the economy seems to wake up, it is still a slow comeback. The last thing we want is to kill the economy in its sleep!

Final Thoughts

I don’t think there is much to worry about regarding the interest rate in 2010. However, it is being unrealistic to believe that we will ride on low interest rate for the next 25 years. It will eventually go up so you better pay off your debt while the interest rate is minimal!

Author: Mike.

Image source: clifff1066


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