Mortgage Forecast for 2005

Leading analysts say several key factors are expected to keep the mortgage market strong and active this year.

The primary factor will be interest rates, which should remain near record-low levels. In mid-January, the average rate for a 30-year, fixed-rate mortgage was 5.34 percent with a discount of 0.62 points. Experts expect that rate to slowly rise to peak around 6.5 percent this year.

Another factor expected to boost mortgage activity has been an increase to the maximum amount allowed for a standard "conforming" loan. Set by the Federal National Mortgage Association, or "Fannie Mae," the amount was boosted from $333,700 to $359,650, effective in January 2005. Loans for amounts larger than this are referred to as "Jumbo" loans, and they carry higher interest rates, making borrower qualification more difficult. Raising the conforming loan maximum will enhance the ability for some people to qualify for a mortgage.

A third factor working to create an active mortgage market is the increasingly widening variety of loan plans being made available to borrowers. Individual borrowers can select from a plethora of options from no-money-down loans to 80-percent, fixed-rate loans to adjustable rate mortgages (ARMs) to interest only loans to "hybrid" mortgages and more.

Home equity loans also are expected to remain attractive this year, with an average rate at 3.77 percent in mid-January. Home equity loans are often appealing because they usually provide tax-deductible interest for financing expenses like car purchases, college tuition, home remodeling and more.

Another mortgage niche where business is expected to grow this year is sub-prime lending. Sub-prime lenders issue loans with higher-than-market interest rates to high-risk borrowers, such as those with below average credit or a bankruptcy. People with credit scores as low as 500 may qualify for such a loan. In some cases, these loans can cover the full value of a property.

Mortgage interest rates remained low throughout 2004, even in the wake of actions by the nation's Federal Reserve Board to jack up rates to banks in order to cool down an economy the Fed felt was being over-stimulated. As the governing body of the nation's federal banking system, the Fed creates national monetary policy.

Sales of both existing homes and new homes were at record highs last year, largely due to incredibly low mortgage interest rates. Economists say the low rates stimulated so much demand that they pushed home prices even higher than they might otherwise have gone.

The extent of value increases varied greatly from region to region, with the West and East coasts the greatest increases. The largest single-state increase was in Nevada, where home values surged 36 percent. Hawaii reported a growth of 28 percent, while California increased by 27 percent.

Officials at the Federal Home Loan Mortgage Corporation, more commonly known as "Freddie Mac," predict that the growth in home prices will slow to a more moderate rate this year because of the expected rise in mortgage rates.