With the New Year right around the corner, experts have begun to make their forecasts about mortgage rates for the upcoming year. Here we share some of the Mortgage Bankers Association (MBA)’s predictions for 2014.

First, the MBA predicts a rise in mortgage rates during the New Year, with a 5% increase in 2014 and an average increase of 5.3% over the next two years.

This is a significant increase in rates if you look at the current average mortgage interest rate of 4.5%. This rate for a 30-year fixed-rate mortgage nears its lowest since June of this year.

Part of the reason for this anticipated increase in rates can be attributed to the Federal Reserve’s plan to ease back and eventually discontinue its bond-buying program during 2014. The Fed has been purchasing $85 billion in mortgage-backed securities every month for the last two years in an effort to keep mortgage rates low and to aid the housing market.

Since the release of this data by the MBA, the Federal Reserve has already announced that it will begin cutting back its bond-buying program by $10 billion in January 2014. It is their belief that the economy is showing enough signs of improvement to warrant a decrease in buying.

Also included in their forecast for the New Year, the MBA stated that they believe they will see at least a nine percent increase in application for new mortgages during the year. Improvements in employment figures and an increasing amount of people desiring to purchase homes will drive the market. Additionally, with home prices continuing to rise, consumer confidence has also risen. High consumer confidence levels usually lead to more home sales.

The report stated, however, that they are anticipating a 32% decrease in refinancing mortgage applications. Refinancing usually declines when interest rates rise (it’s a natural part of the process). The report also states that homeowners will likely opt for home equity second mortgages instead of cash-out refinancing. At this time, refinancing is the largest portion of all mortgage applications.

New mortgages only account for 30% of the loans issued in 2013. It’s anticipated that this will increase to 60% or more in 2014. Cash-only sales are anticipated to drop, however, as fewer distressed properties are available. The MBA also anticipates higher loan-to-value ratios as home prices continue to climb.

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