Interest rates are going up - Federal Reserve policy is changing on March 31st

The Federal Reserve has been purchasing mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac since early last year. The purchase program has helped maintain low interest rates for borrowers. As planned, the Fed this week announced it will stop purchasing these securities at the end of this month. Many analysts anticipate this will result in a slight rise in rates by year’s end.

Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.

The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to C.A.R.’s 2009 Survey of California Home Buyers.

Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.