Are we still heading toward 5% mortgages?

Julie C. Nichols General

CNNMoney.com – Les Christie

Prospective buyers who have been shying away from the housing market due to rising rates may have reason to start shopping again. On Wednesday, the Federal Reserve surprised market watchers when it announced that it would not start tapering its purchases of mortgage-backed securities and Treasury bonds. Mortgage rates have risen significantly amid concerns that the Fed would cut back on its $85 billion a month bond-buying program. Rates on a 30-year fixed mortgage are currently averaging about 4.5%, up from 3.35% in early May. That rate increase has meant an extra $132 a month in payments for a homebuyer with a $200,000 30-year loan.

But now that the Fed has said it will continue to purchase the bonds, rates will likely retrace some of those gains, said Keith Gumbinger of mortgage information provider HSH.com. "Now, we do have some space for rates to fall," he said. "I don’t expect a plummet, just a drop of 0.1 percentage points or so over the next week or two."

The day after the Fed’s announcement, Freddie Mac reported that rates on 30-year fixed-rate loans fell from 4.57% to 4.5% over the past week. Freddie Mac’s chief economist, Frank Nothaft, said rates were reacting to the same economic trends that influenced the Fed’s decision. Nothaft expects rates to hit about 5% by mid-2014. That’s an increase of less than $24 a month for every $100,000 borrowed — enough to weed out borrowers who are struggling to afford homes but not enough to impact overall demand.

>> Read more: http://money.cnn.com/2013/09/19/real_estate/mortgage-rates/