News Column

Mortgage Rates May Be Heading Higher

May 30, 2013
Home and money

Mortgage interest rates are back to their highest levels in a year -- and may creep higher still.

After hitting a five-month low in early May, rates have made an abrupt turnaround

The average rate for a 30-year fixed-rate mortgage for loans under $417,500 hit 3.9% for the week ended Friday, the Mortgage Bankers Association said Wednesday.

That's the highest since May 2012, and up from 3.59% for the week ended May 3.

The increase spurred a 12% drop in refinance applications, the largest single-week drop in such applications this year, the MBA says.

The rise has "been a very dramatic move," says Bob Walters, chief economist for Quicken Loans. "Mortgage rates have jumped more in the past week than they have in years."

Rates trended higher all month on the strength of good economic reports. They really moved last week, Walters says, as markets reacted to mixed signals from the Federal Reserve that raised the possibility it might begin to taper its purchases of mortgage-backed securities and Treasury bonds sooner rather than later. Those purchases have helped keep interest rates low.

"That's created a little panic wobble," says Keith Gumbinger of mortgage tracker

Mortgage rates follow the yield on 10-year Treasury notes, which finished at 2.12% Wednesday, up from a low of 1.63% earlier this month.

Even if rates head higher, they won't go very far, very fast, says Frank Nothaft, Freddie Mac's chief economist: "We're seeing the first steps in a gradual uptick."

Freddie Mac reports its weekly survey data today. For the week ended May 23, 30-year rates averaged 3.59%. Nothaft expects them to move above 4% sometime next year.

The Fed has said it will keep its monetary policy in place until unemployment hits 6.5%, assuming inflation is in check. With unemployment running at 7.5%, no big changes are likely, Nothaft says.

While higher rates have cooled refinance activity in recent weeks, they could spur some fence sitters, says Doug Lebda, Lending Tree's CEO. Given the rise in home prices the past year, some lenders are also loosening guidelines so more people can refinance, Lebda says.

In recent weeks, some loan shoppers have also quickly adapted to rising rates by switching to 10-year loans, which carry lower interest rates than 30-year fixed-rate loans, Walters says.

Nationwide, more than 45% of homeowners with a mortgage had interest rates above 5% as of December, show data from market watcher CoreLogic. Many of those homeowners probably lack enough equity in their homes to qualify for a new loan.

Source: Copyright USA TODAY 2013

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