Mortgage rates inched up this week, despite the Fed's latest efforts to hold rates low. Some experts worry that as investors gain confidence in the economy, rates may keep climbing. Others say there's still plenty of bad economic news to keep rates at the bottom.
The benchmark 30-year fixed-rate mortgage rose 7 basis points this week to 4.25%, 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 0.31 discount and origination points. One year ago, the mortgage index was 4.97%; four weeks ago, it was 4.21%.
The benchmark 15-year fixed-rate mortgage rose 6 basis points to 3.45%. The benchmark 5/1 adjustable-rate mortgage rose 3 basis points to 3.09%.
Are Investors Pushing Rates Up?
For months now, the debt crisis in Europe and the weak economy in the United States have helped mortgage rates, but the trend is shifting, says Dan Green, a loan officer at Waterstone Mortgage in Cincinnati.
"The forces that combine to bring mortgage rates down all seem to be subsiding," he says. "Greece is closer to resolution; the jobs market is returning; the U.S. economy is heating up."
Even though the debt crisis in Europe still remains a major threat to the global economy, investors seem to have gotten used to the idea of a potential default, says Brett Sinnott, director of secondary market at CMG Mortgage in San Ramon, Calif.
"A Greek default is not scaring people as much as it used to," he says. "It's like, if you talk about something enough, you get used to it, even if it's bad. They keep kicking the can down the road, but nothing is actually happening yet."
Sinnott says this week's rate increase already affected the volume of refinance applications.
The volume of mortgage applications declined 5% last week, compared to the previous week, according to the Mortgage Bankers Association.
Higher Fees Add Pressure to Rates
Another factor adding pressure to rates is a recent increase in fees Fannie Mae and Freddie Mac charge lenders. That increase will get passed on to borrowers and will translate into about an eighth to a quarter of a percentage hike in interest for a 30-year fixed mortgage.
But Fed Wants Low Rates
The Fed isn't as optimistic about the economy, and it's determined to keep rates low.
"While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated," read the Federal Open Market Committee's statement on Wednesday. "Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed."
The Fed says it will keep the key federal funds rate near zero until late 2014. Previously, it had committed to keeping the rate low until mid-2013. While the federal funds rate isn't directly tied to mortgage rates, it influences their direction.
It also will continue to reinvest in long-term securities and mortgage-backed securities, which is another way to keep rates low.
David Kuiper, a mortgage planner at First Place Bank in Holland, Mich., says he doesn't foresee higher rates anytime soon.
"People still see investing in the United States as a safe haven," he says. "But you don't want to take a chance."
That's especially true for homeowners who have rates in the 6% or 7% range.
"If they lock now, they are still so ahead of the game," he says.