Everyone planning to shop for a home or considering a refinance is asking the same question: Where will mortgage rates go in 2015?
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For years, rates have remained low, mirroring other long-term interest rates. Fears have grown that the trend will inevitably reverse. At some point, rates will begin to jump much higher and closer to their historic norms.
However, in the coming year, mortgage rates are unlikely to rise much -- if at all, says Patrick J. Dennis, associate professor of commerce finance at the McIntire School of Commerce at the University of Virginia in Charlottesville.
Dennis says several factors are at work in the economy that will likely keep a lid on rates for the foreseeable future.
He also offers his take on other topics -- from the wisdom of choosing an adjustable-rate mortgage to the state of the nation's housing market -- in the following interview.
In recent years, mortgage rates have been low, although they have risen a bit from their extreme lows. What trends do you expect to see for mortgage rates as we head into 2015?
While the termination of quantitative easing (QE) has put slight upward pressure on rates, growth in the U.S. is soft, growth in China is slowing and growth in Europe is dismal.
Since all economies are tied together via import/export markets, given the abysmally slow rate of overall global growth, mortgage rates will not rise too much in 2015, if at all.
Furthermore, demand for mortgage bonds should remain strong since there are few alternatives that investors have, given the low yields on Treasuries and the high valuations in equity markets. This high demand for mortgage bonds will also help to keep mortgage rates relatively low.
Banks appear to be lending a bit more than in the past. How easy is it now to get a loan?
Low mortgage rates are great news for people who can get loans -- namely those with stellar credit scores, those who can put 20 percent down and those who have low payment-to-income ratios.
It has been tougher for borrowers who have spotty credit histories and can't make large down payments.
That being said, lenders have gotten over the shell shock from the 2008 housing crisis, and the demand for yield means that credit standards will begin to loosen in 2015. This is a good thing.
Standards have gone from being too loose before the crisis to too tight after the crisis. We need to be in the Goldilocks range, where reasonable loans are made to borrowers who can reasonably pay them back.
This will have knock-on effects to the rest of the economy, as people who buy homes have to furnish them, repaint the bathroom, landscape, etc.
A lot of people believe a significant rise in long-term interest rates -- including mortgage rates -- is long overdue. With that in mind, is it too dangerous to consider an adjustable-rate mortgage at this point?
If a homeowner will be in a house for five or more years, there is little upside to a 5/1 ARM. Five years from now, growth in Europe could reignite and growth in the U.S. could become more robust, putting upward pressure on rates.
However, say a young couple is planning on starting a family, can only afford a small starter home right now, but they plan to move up to a larger home in five years when their family grows and income rises. In this case, a 5/1 ARM could make sense, especially compared to a 30-year fixed-rate mortgage.
The couple would be guaranteed a low rate for the first five years, then retire the mortgage when they sell their first house to trade up to a larger home.
What are some other developing trends you see surrounding mortgages and mortgage rates? What developments do you anticipate for 2015?
Interest rates are notoriously hard to predict. That being said, if I had to place a bet, I'd bet on rates staying where they are or rising only modestly through 2015.
Growth in Europe is slow, growth in China is slowing and technologies such as hydraulic fracturing will continue to keep oil prices low.
The headline unemployment numbers are falling, but there are still people on the sidelines who have given up looking for work and may jump back into the labor force as conditions improve. Furthermore, there are a lot of people who are underemployed and/or working part-time jobs.
These factors could increase the economy's productivity while keeping inflation low, and give central banks leeway to keep interest rates low as they try to ignite growth.
What is your take on the overall state of the nation's housing market? Do you expect things to improve in 2015, or to regress?
It depends if you are buying or selling. There is a low inventory of new homes, and much of the skilled labor that used to work in home construction has moved to other sectors, such as hydraulic fracturing. Homebuilders will not be able to instantly create inventory, keeping a lid on the supply of housing stock.
Meanwhile, demand will continue to increase. Many young adults have delayed getting married and starting families, instead choosing to live with their parents or with roommates. As the job market gradually improves, these new buyers will put increased demand on limited housing stock, thus putting upward pressure on prices.
This is also connected to the mortgage market. As prices gradually increase, lenders will feel more comfortable making loans. After all, these loans will be secured by assets that are going up in value.
The demand for yield will also put upward pressure on the number of new mortgages issued, keeping new money flowing into the market with negligible rate increases. This will increase demand for housing even more, providing firm price support for housing.
If you could offer one tip to people shopping for a mortgage -- and hoping to get the best rate -- what would it be?
Do everything you can to improve your credit score -- make sure you are current on all bills, try to retire your credit card balances and don't open or even apply for any new lines of credit or credit cards.
Also, use the Internet to shop around -- your local bank may not have the best rate.
Copyright 2014, Bankrate Inc.