Mortgage rates defy experts to close year below 4%, Freddie Mac says

Mortgage rates edge higher as year ends but wind up under 4%

Closing out a year of surprisingly low mortgage interest rates, the average rate for a conventional 30-year home loan was 3.87% this week, Freddie Mac said, up slightly from 3.83% a week ago.

The home-financing giant reported that the 30-year rate averaged 4.17% for all of 2014, following two years of even lower rates fostered by the Federal Reserve's easy-money policies aimed at spurring the economic recovery.

The average for a 15-year fixed-rate mortgage early this week was 3.15%, down from 3.55% a year ago. The start rates for variable home loans were slightly lower as well, Freddie Mac said.

The only sub-4% years for the 30-year loan in the Freddie Mac survey were the previous two years — 3.66% average in 2012 and 3.98% in 2013. The company has polled lenders each week since 1971 about the terms they are offering borrowers.  

The annual peak was 16.63% in 1981 when then-Federal Reserve Chairman Paul Volcker forced rates sky-high to rein in rampant inflation.

The rate back then would have been even higher had not borrowers been paying an average of about 2% of the loan amount upfront to lower their rates.

In 2014, by contrast, borrowers averaged paying 0.6% of the loan amount in upfront lender fees and discount points, Freddie Mac said.  

When the year began, the 30-year rate was at 4.5%, and nearly all economists believed it would rise to 5% or higher by this time, mainly because the Fed was ending one of its key stimulus measures: the massive purchases of Treasury securities and mortgage bonds backed with government support by Freddie Mac, Fannie Mae and Ginnie Mae.

The Fed phased out the stimulus over the course of the year, announcing its end in late October.  

Interest rates fell nonetheless, driven by complex factors including dormant inflation in the United States and weakening economies and rising political tensions abroad.

Having been so far off the mark last year, economists have sounded tentative in their prognostications for 2015.

“If you told me fixed mortgage rates were near 4.5% at year-end 2015 I wouldn’t be surprised,” said Mark Zandi, the chief economist for Moody’s Analytics.

But he acknowledged being “wrong about fixed mortgage rates all year.”

“Instead of rates rising,” Zandi said, “they fell.”

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