Mortgage Rates Spike as Economy Heats Up; Will They Rise Higher?

Mortgage Rates Spike as Economy Heats Up; Will They Rise Higher?

Mortgage rates have spiked considerably over the past four weeks as a slew of positive economic data has hinted that the economy may be picking up steam. Will rates continue to rise?

Mortgage rates have spiked considerably over the past four weeks as a slew of positive economic data has hinted that the economy may be picking up steam. While Fed Chairman Ben Bernanke indicated on Wednesday that the Fed may eventually scale back its bond buying program, this is not the only impetus to the spike in interest rates. Mortgage rates had been rising considerably even before the Fed Chairman’s speech. The speech simply provided more evidence that the economy is mending and that the free money era of the last five years may be closer to ending than many expected or wanted.

The chart below shows that 30 year mortgage rates bottomed in December of 2012, while 15 year rates hit their low in February. 5/1 ARMs, which are based on short term interest rates are still near their lows (the Fed has more control over short term rates and has kept the main rate at 0%).

Mortgage Rate Trends

According to BestCashCow data, average 30 year mortgage rates are now 4.043%, up from 3.440% in December. In looking over our database, I’ve seen the number of lenders offering 30 year mortgages with no points and a rate below 4% shrinking considerably over the past month. The 4% 30 year rate will soon be extinct.

The NY Times ran an article saying that mortgage rates may stabilize soon. That’s possible but I’m not so sure. Rates on all kinds of bonds – corporate, federal, and municipal – spiked in the past two weeks and I think the bond market is looking ahead to accelerated growth. The bond market is often a better predictor of future economic activity than the stock market.

What Should You Do?

If you haven’t refinanced, do it. The risk of more rate increases is significantly higher than the possibility of lower rates. If you need to lock your rate I would also do that. As we’ve seen, rates can move up significantly in a short period of time. And if you’re waiting on the sideline to buy a house until rates come down, don’t do it. Mortgage rates are still historically low and timing the bottom is an impossible task.

No one really knows what is going to happen and even the best experts are proved wrong most of the time, but hopefully this provides you with a bit of perspective that you can use to make your own decisions.

Image: ddpavumba at FreeDigitalPhotos.net

Reviews

  • Ari Socolow

    June 21, 2013

    ARMs always make sense (a) if you plan to sell the property within the period during which the rate is not adjustable, or (b) if you have the resources to pay all or substantially all of the mortgage principal should the rate adjust up. Under those two circumstances, they still make sense today. I however agree with the Raj Rebulan's comments that the advice in the NYT article is wholly inappropriate for most readers.

  • Geoffrey Tomczak

    June 21, 2013

    I graduated from Wharton and bought a condo in NYC in 1997 and got a 5 year ARM when they were much more rare than they are today. The rate was 6.625% and it was the only way to get under 7.125%. My colleagues and professors told me that I was taking a huge risk at the time, and with the benefit of hindsight I was. Interest rates could have easily moved higher and I would have been wishing that I had locked into the 30 year. I got lucky. There is no room for rates to go down now. Everybody knows that are going up. It would be foolhardy not to lock into a fixed rate mortgage.

  • Dave Torkin

    June 21, 2013

    McBride is way off. The ARM is really dangerous in any environment, especially this one. It can float in 5 years and is usually based on the 10 CMS or a LIBOR rate. Sometimes it is limited to moving no more than 2%, but many can move completely freely. It you get one of these today, you may save a few basis points versus the straight 30 year but you could easily be paying 7 or 8% in a normalized interest rate environment in 6 or 7 years. Go with the 30 year.

  • Raj Rebulan

    June 21, 2013

    I had read the New York Times article earlier in the day and had been taken aback by how inappropriate the advice provided by Bankrate's economist is. He is essentially telling people not to worry about adjustable rate mortgages (ARMs) because the rate is going to stabilize around 4 to 4.50% in the "long term". The problem is that the Bankrate economist thinks that the long term is 6 months and the article is written for people looking to finance homes and cars who have 30 year time horizons. Anybody buying a home and intending to stay in it for 30 years runs a significant risk of being forced to refinance at a much higher rate when the ARM begins to float in 5 years.

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