SANTA CRUZ (March 6, 2010) - The Federal Reserve has been giving homeowners and homebuyers a gift for the past 15 months. Since the Fed announced its commitment to purchase $1.25 trillion of mortgage-backed securities in December 0f 2008, 30 year fixed rates have been hovering at or below 5 percent. That commitment will have been fulfilled by the end of this month and many analysts are expecting interest rates to rise. The question is how much and how soon.

To encourage a smooth transition of rates, the Fed announced several months ago that they would be winding down their securities purchasing program at the end of March. We had expected rates to start rising by the beginning of the year but that has clearly not been happening. In fact, some are saying that rates may not be moving up even after the Fed stops their purchase program.

Don’t believe it. We have enjoyed an incredible ride with these low mortgage rates and the mortgage industry, housing industry and the economy as a whole has benefitted but do not count on rates staying this low. For one thing, once the Fed stops purchasing these mortgage-backed securities, it announced at its meeting last month that it would begin a process of selling these securities. This undoubtedly will lead to upward pressure on rates.

Also, as we all know, inflation is the arch enemy of low rates. As the economy heats up and inflation begins to rise, one key tool the Fed will apply to slow down growth will be to increase the Fed Funds Rate, which still stands at 0 – 0.25 percent. Since Prime Rate is tied directly to the Fed Funds Rate, consumers will start noticing increased rates on equity lines of credit, credit cards, car loans and adjustable rate mortgages If inflation stays in control, the Fed may leave rates alone, at least for the short term.

Homeowners who have not taken advantage of the low mortgage rates and prospective homebuyers who are wondering when to jump into the marketplace are well advised to meet with a mortgage professional as well as a real estate professional to find out what their options are and whether or not it makes sense to make a move now. We all need to keep in mind that Santa Cruz County represents a unique market (weather, beaches, politics, demographics, etc.) and what we read and what we view on television about home sales, home prices and foreclosures nationwide cannot be automatically accepted as being the case here.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.