The Payroll Tax Law: Will there be a Rise in Mortgage Rates?
The mortgage loan market already shows signs of a mortgage rate increase.
The Temporary Payroll Tax Cut Continuation Act of 2011
President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 on Dec. 23, 2011. The payroll tax law insures the continuance of the lower payroll tax rate for an additional two months, until the end of February 2012. In order to fund the payroll tax break the law calls for a raise in mortgage guarantee rates taken by Freddie Mac, Fannie Mae and the FHA.
The purpose of the law is to reduce cash outlays by small business owners and put more money in the worker's pocket. This helps put more money in your pocket at the end of the month, but it is not significant when making a long term commitment to pay a mortgage loan. Although it seems likely that the payroll tax cut will be extended, it has been a source of political tension in an election year.
Due to the payroll tax law passed by Congress, industry experts expect that mortgage rates will increase Mortgage lenders are already increasing their mortgage interest rates by about ¼%.
The payroll tax law calls for a guarantee rate increase of at least 10 basis points (or 0.1%, which means $100 per year for every $100,000 borrowed). This mortgage fee increase will directly affect all Fannie Mae, Freddie Mac loans that will be delivered to them after February 15 (to be included in the March security). FHA loans will also be required to pay the 0.1% guarantee fee on all their new loans. Expectations in the mortgage industry are that the required mortgage fee increase will translate into an even larger increase in mortgage fees and interest rates. Some predict that the guarantee fee will be raised by more than 0.1% and interest rates could rise between 1/4 - 1/2%.
For more information about the Payroll Tax Law and its implementation for the first two months of 2012, see the IRS article Payroll Tax Cut Temporarily Extended into 2012.
Market Conditions and Mortgage Rates:
Market conditions determine mortgage rates. Some of the main factors are the supply and demand for money, housing, and inflationary pressures. One of the main factors to watch is the job market. A stronger and more stable job market will to create more pressure on the housing market.
The new payroll tax law and increase in the guarantee fee has already put upward pressure on Mortgage Rates and Mortgage Fees. However, this pressure may be offset by other factors that can keep the Mortgage Rates and Mortgage Fees stable or even drop.
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Bottom line, rates are at all-time lows. Now is a great time to take advantage of a low rate mortgage refinance. Do your homework and make sure you understand what market rates are. Then make a smart mortgage shopping decision using all of the tools that we make available to you. Good luck!