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Who's Hurt by Mortgage-Rate Jump

Peter McDougall

The interest rate for 30-year fixed rate mortgages surged to 6.32% with 0.7 points last week (up from 6.09% and 0.6 points). This represents the highest rate for 30-year fixed loans since October, according to the latest Freddie Mac(FRE Quote) Primary Mortgage Market Survey.

In his weekly commentary, Frank Nothaft, Freddie Mac's chief economist, attributed the surge in rates to inflation concerns expressed by a number of Federal Reserve officials, most notably Chairman Ben Bernanke and Vice Chairman Donald Kohn.

Nothaft also cited changes in the futures market that serves as a predictor of rate changes: "The federal funds futures now suggest the Fed will increase the overnight lending rate by 50-75 basis points by next January." A basis point is 1/100th of a percentage point.

The futures market still anticipates that the Fed will hold rates steady at its June meeting, but there was an almost 30-percentage-point increase in the chance that the Fed might raise rates at its August meeting. (The futures market still predicts that rates will remain steady, but that probability is now below 50%.)

If you're looking to take out a mortgage, higher rates mean higher monthly payments on adjustable rate mortgages and on new mortgage applications that haven't yet locked in rates.

Say you want to borrow $200,000. If you had locked in your rate last week, your monthly mortgage payment would be $1,210.70. At this week's rates, however, that payment is now $1,240.55. That amounts to an extra $358.20 per year, and more than $10,750 in additional interest accrued over the life of the loan.

Falling home prices could help soften the blow from rising interest rates, although high rates and low home values represent a double whammy for homeowners looking to refinance their existing loans.

Home prices are expected to continue to decline through the year, according to the National Association of Realtors, expected to recover only slightly in the first part of 2009. And that group has tended to be on the optimistic side of housing-market predictions , so it might be even longer than that.

Meanwhile, mixed signals in terms of the number of new mortgage applications seem to point to an overall improvement in sales volumes entering the summer.

According to the Freddie Mac survey, however, rates for 15-year fixed rate mortgages experienced a jump similar to their 30-year counterparts. Rates for the 15-year loans rose to 5.93% with 0.6 points, up from 5.65% and 0.6 points last week. ARMs were less affected: 5/1 ARMs (five years at a fixed rate followed by rate adjustments at one-year intervals) were up to 5.70% and 0.7 points from 5.51% and 0.5 points. Meanwhile, one-year ARMs, in which the rate adjusts every year, rose just three basis points to 5.09% and 0.6 points, up from last week's 5.06% and 0.7 points.

If you're one of the growing numbers of consumers trying to take advantage of interest rates while they remain low, you can head to the mortgage section of BankingMyWay.com to get up to date offers and interest rates.