Mortgage rates have been at historical lows since 2008 following the financial crisis, but the consensus is that they will rise; it's just a matter of how much and when.

The average rate for a 30-year fixed-rate mortgage has fluctuated between just above 4% and 4.5% for most of 2014. The Federal Home Loan Mortgage Corp., or Freddie Mac as it is commonly called, is predicting rates will rise to 5% in late 2015. (For more, see: How To Shop For Mortgage Rates.)

Mortgage rates are determined by a number of factors tied to the economy, the debt markets and Federal Reserve policy.

Link To Treasury Bonds

Interest rates on fixed-rate mortgages are linked to Treasury bond rates. Treasury bonds are issued by the U.S. Treasury Department to pay for debt.

The rate on 30-year fixed-rate mortgages, for example, is typically tied to the yield on 10-year Treasury bonds. The yield is the rate of return expressed as a percentage. When the yield goes up or down so do interest rates.

Rates on adjustable rate mortgages (ARMs), meanwhile, are tied to the Federal funds rate. This is the rate at which a depository institution or bank lends funds maintained at the Federal Reserve to one another overnight. (For more, see: Mortgages: Fixed-rate vs. Adjustable Rate.)

When the economy is ailing the Federal Reserve keeps interest rates low to encourage borrowing and stimulate spending among consumers. This is what happened after the financial and housing markets collapsed and why rates have remained at historical lows.

Quantitative Easing To End Soon

In an unusual move following the collapse of the markets, the Federal Reserve began a quantitative easing (QE) program in late 2008. In an effort to boost the economy and housing markets it began buying U.S. Treasury bonds and mortgage-backed securities, which helped lower mortgage rates. (For more, see: Quantitative Easing: Does It Work?)

The Fed has bought more than $4 trillion in Treasury bonds and mortgage-backed securities since the inception of the program.

Interest rates are expected to rise after the Federal Reserve's quantitative easing bond-buying program is tapered off. The Fed has indicated it will most likely end in October. (For more, see: What Will Happen To Treasury Yields With Yellen And Tapering?)

Strengthening Economy

Other factors contributing to an anticipated rate increase include a strengthening economy. Economic growth is expected to average 3.3% in 2015, according to Freddie Mac. The unemployment rate is also falling and is expected to continue to do so. Remember, when the economy is struggling interest rates are kept low to stimulate growth. (For more, see: What The Unemployment Rate Doesn't Tell Us.)

Mortgage rates were expected to rise sooner. But the Federal Reserve, headed by Janet Yellen, is balancing — not raising — rates too early to prevent harming a still delicate economy and housing market.

The Bottom Line

Barring another financial and housing market implosion, and if the economy continues to improve, expect interest rates to rise in the latter half of 2015. If they do jump to the 5% range it will be a modest hike when compared to historical averages. Rates will still be far below the approximately 8.5% 30-year fixed-rates mortgages have averaged since 1971 when Freddie Mac started tracking them. Rates averaged 6% in the years leading up to the recession. (For more, see: Mortgage Basics: An Introduction.)

Related Articles
  1. Investing Basics

    Forecasting Mortgage Rates: Buy, Sell Or Refi?

    If you're paying off a mortgage or plan to buy a home, chances are you pay attention to where mortgage rates are heading. Consider these scenarios.
  2. Credit & Loans

    How To Shop For Mortgage Rates

    Take these 5 steps to getting the lowest possible rate for your mortgage. Small percentage differences can mean big savings down the line.
  3. Home & Auto

    How To Find The Best Mortgage Rates In Your State

    There are plenty of things that you can do to find a rate that will not only make it easier for you to afford a mortgage, but will also be better than any other offered in your state.
  4. Credit & Loans

    All-Time Low Mortgage Rates: Time To Refinance?

    Interest rates keep dipping lower and lower. Find out what it takes to tip the scales toward a refinance.
  5. Personal Finance

    Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.
  6. Financial Advisors

    Ditching High-Yield Bonds for Plain Vanilla Ones

    In a low-rate environment, it's tempting to go for higher yield bonds. However, you might be better off sticking with the plain vanilla ones.
  7. Bonds & Fixed Income

    What is an Indenture?

    An indenture is a legal and binding contract between a bond issuer and the bondholders.
  8. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  9. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  10. Credit & Loans

    Student Financial Aid Changes: FAFSA 2015-2016

    Here is a look at some of the major changes to FAFSA in 2015 - 2016 and how they will affect student financial aid.
  1. Are mortgage rates negotiable?

    Mortgages are just as negotiable as any other product or service. Whether it's a new home purchase or refinancing of an existing ... Read Full Answer >>
  2. Does an FHA loan require a down payment?

    Federal Housing Administration (FHA) loans require down payments, which can be as low as 3.5% of the total purchase price ... Read Full Answer >>
  3. Do FHA loans have closing costs?

    Because Federal Housing Administration (FHA) loans are provided by financial institutions, taking out an FHA loan entails ... Read Full Answer >>
  4. Do hedge funds invest in bonds?

    Hedge funds have the freedom to deploy their capital in virtually any manner. They can use leverage, invest in non-publicly ... Read Full Answer >>
  5. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
  6. Can mutual funds only hold bonds?

    While some mutual funds include bonds in addition to other asset types, certain funds, aptly named bond funds, hold only ... Read Full Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center