If you’re not actively looking to buy, you won’t notice that interest rates appear to be creeping up. But if you’re in the market (or thinking about it)  it’s good to understand what drives interest rates. This past Wednesday was a very important milestone for mortgage rates. Why?

Money to buy homes historically has come from “investors” – pension plans, 401(k) plans, mutual funds, banks – the list is long. As long as these investors were willing to safely (in their perception) loan money, home buyers got their mortgages.  Thousands of loans were bundled together and sold off to these investors, and the cycle of money continued to go round and round – until something happened to jam up that cycle.

That happened with the financial crisis. The cycle broke. Realizing that the housing industry was critical to the overall economy, the government basically took over Fannie Mae and Freddie Mac and said they would now become the “investor” who would buy these mortgages, keeping the cycle of mortgage money flowing. It worked – and interest rates were very low to entice buyers into the marketplace. The Fed bought about $1.25 trillion worth of mortgages via Fannie and Freddie.

But the Fed decided the economy was strong enough for “private” money (ie, the traditional investors) to start financing the housing industry and on Wednesday said they would stop buying mortgages. It’s now up to the traditional investors to step to the plate.

Because private investors may see risk differently than the Fed, many assume these investors will want a higher rate of return for their perceived risk of loss – thus higher interest rates. How high? The National Association of Realtors thinks rates may creep up to around 5.6%.

Bottom line – if you’re thinking of buying, and an increase of half a percent in mortgage costs would negatively impact your ability to get into the home of your needs and desires, I encourage you to act now to lock in today’s low rates. Plus – you’d qualify for the Governator’s $10,000 credit if you’re a first time home buyer!