Mortgage interest rates rose sharply again this week, touching the 5% threshold and presenting more bad news for borrowers.
Mortgage rates for Dec. 15, 2010
The benchmark 30-year fixed-rate mortgage rose 11 basis points this week, to 5%, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 5.13%; four weeks ago, it was 4.62%.
The benchmark 15-year fixed-rate mortgage rose 11 basis points, to 4.37%. The benchmark 5/1 adjustable-rate mortgage rose 10 basis points, to 3.95%.
Weekly national mortgage survey
Results of Bankrate.com's Dec. 15, 2010 weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed 15-year fixed 5-year ARM
This week's rate: 5.00% 4.37% 3.95%
Change from last week: +0.11 +0.11 +0.1
Monthly payment: $885.76 $1,251.30 $782.99
Change from last week: +$11.06 +$9.21 +$9.46
This is the highest rate for the 30-year fixed in seven months. On May 12, the 30-year fixed stood at 5.07% in Bankrate.com's weekly survey. After that, it fell below 5% and stayed there -- until this week. Just six weeks ago, the benchmark 30-year rate was 4.42% -- a record low in the 25-year history of the weekly rate survey.
The steep and sudden jump was triggered by signs of an improving U.S. economy, says Peter Ogilvie, president of First Residential Mortgage Corp. in Santa Cruz, Calif.
"We've been getting positive or slightly positive reports that suggest positive movements in the economy, and that will send rates up," he says.
That relationship may seem counterintuitive, but a stronger economy draws investment funds into equities and away from the bond market. Lower demand for bonds means lower prices and, inversely, higher yields -- and interest rates follow the movement of bond yields.
When the dust settled, borrowers faced mortgage rates at least three-eighths to one-half of a percentage point higher than those they may have been quoted last month, Ogilvie says. A rate that's half a point higher on a $200,000 loan adds about $60 to the monthly payment. Bankrate.com's mortgage calculator lets you see what happens to monthly payments when rates change.
Here's a summary of what happened:
* The Federal Reserve held its target federal funds rate unchanged at zero to 0.25% Tuesday, but noted in its statement that the "economic recovery is continuing," "consumer spending is increasing at a moderate pace," and "business spending on equipment and software is rising."
* The Fed said it plans to continue buying U.S. Treasuries, a move that has triggered fears of future inflation.
The Fed's words, as well as its actions, have a "significant impact on the market and mortgage rates as bond investors look for any indication of what the Fed's going to do next," says Joe Metzler, a mortgage specialist at Mortgages Unlimited in West St. Paul, Minn.
* President Barack Obama and Congress struck a deal to extend federal income tax breaks for virtually all taxpayers, reduce the payroll tax through 2011, reinstate a smaller estate tax and ease some federal business tax rules. These changes -- and an end to the long uncertainty -- are expected to spur additional spending.
* Retail sales rose 0.8% in November, the fifth consecutive monthly increase and better than private-sector expectations of 0.5% growth, according to the U.S. Department of Commerce.
* European nations have made strides in the eurozone's debt crisis, a development that prompted investors to leave the security of U.S. Treasuries, causing bond yields and mortgage rates to rise, according to a statement from Freddie Mac.
Rates up 0.25% or more
Metzler says borrowers should focus on current rates and actually take the advice they're offered by experienced mortgage professionals. Both Ogilvie and Metzler report that the rate jump prompted some borrowers to break their holding pattern and finally lock in a higher rate.
Homeowners jumped off the fence nationwide, according to the Mortgage Bankers Association, which reported that refinance applications fell just 0.7% last week, despite the rise in mortgage rates.
"If you have a chance to lock now, lock," Ogilvie says. "The chances are, at this point, much better that rates will rise slightly in the near future."