Why Mortgage Rates Rose When Fed Held Steady

The Federal Reserve Board's Open Market Committee recently wrapped up its June meeting, leaving the federal funds rate at 2% -- but mortgage rates didn't stay even.

Although the funds rate contributes to rates on consumer loans, such as mortgages and credit cards, it is an indirect relationship. That's why rates on adjustable rate mortgages (ARMs) rose this past week, despite a lack of change in the funds rate.

This is the first time the Fed chose not to drop the rate since it started its slashing spree back in August 2007. The rate was last dropped 0.25 percentage points at the Fed's April meeting, and it's down a total of 3.25 percentage points since around this time last year.

The decision came as no surprise to the markets: Language in the April decision hinted at an end to rate cuts and the federal funds futures market strongly predicted a 2% rate heading into the summer.

But even without a change in the federal funds rate, mortgage rates have been on a steady rise since early May -- a trend that continues this week. The most recent Primary Mortgage Market Survey from Freddie Mac showed that rates for long-term, fixed-rate mortgages (FRMs) drifted up slightly, while rates on ARMs rose more sharply.

Rates for a 30-year FRM rose to 6.45% with 0.6 points, up from last week's average of 6.42% and 0.7 points. Rates for a 15-year FRM rose to 6.04% with 0.6 points, up from last week's average of 6.02% and 0.7 points. Rates on ARMs, however, exhibited a much bigger jump. The rate for hybrid 5/1-yr ARMs (five years at a fixed rate followed by rate changes every subsequent year) is 5.99% with 0.7 points, up from 5.89% with 0.6 points, while 1-year ARMs (rate changes every year) rose to 5.27% with 0.6 points from last week's average of 5.19% and 0.6 points.

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