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. Home & Auto

    Living in New York City: Co-ops vs. Condos

    Buying an apartment in New York City means familiarizing yourself with the pros and cons of these two types of dwellings.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  8. Mutual Funds & ETFs

    4 Mutual Funds to Consider If Interest Rates Rise

    Learn what mutual funds will perform best if interest rates rise. Interest rates can rise due to inflation or to an improving economy.
  9. Investing News

    Fund Firm Jolts: Pimco's Isn't The First Or Worst

    When you business is built on prudence and trust, a lot can go wrong to cost you tons of clients and assets. Here are a few examples.
  10. Credit & Loans

    Refinance Vs. Debt Restructuring: What's Best For Your Credit Score?

    Discover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
RELATED TERMS
  1. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  2. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  3. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  4. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  5. Securities-Based Lending

    The practice of making loans using securities as collateral. ...
  6. Zombie Foreclosure

    A situation (or a home in this situation) that occurs when a ...
RELATED FAQS
  1. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  2. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
  3. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  4. How does the bond market react to changes in the Federal Funds Rate?

    The bond market is highly sensitive to changes in the federal funds rate. When the Federal Reserve increases the federal ... Read Full Answer >>
  5. How do I use the holding period return yield to evaluate my bond portfolio?

    The holding period return yield formula can be used to compare the yields of different bonds in your portfolio over a given ... Read Full Answer >>
  6. What is the relationship between current yield and yield to maturity (YTM)?

    Both the current yield and yield to maturity (YTM) formulas are methods of calculating the yield of a bond. However, these ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!