Are Mortgage Rates Primed To Rise by dane

Mortgage rates rose again this week. This is the third time in the last 4 weeks that mortgage rates have risen. Why are mortgage rates rising? There are numerous factors at play but generally once the economy recovers it's expected that inflation, and mortgage rates, should rise. The last month of generally positive economic news has probably helped nudge mortgage rates up. Although rates are increasing they are increasing in small steps and not large strides. Since July 16th the 30 year rate has only moved from 5.14 to 5.29. While this is interesting it's certainly not a huge move upward.

What is interesting is that the current (small) upward movement in mortgage rates might be the beginning of the rise that many in the financial industry have predicted. If the economy continues to rebound this could be the beginning of mortgage rates steadily moving up to 10% or higher. This is of course dependent on the continued movement of the US economy out of the current recession. While the government has made some statements about curbing inflation it seems more concerned with making sure the US exists the recession.

Of the 4 major indexes 3 moved up this week. The 30 year note rose from 5.22 to 5.29, the 15 year mortgage rose from 4.63 to 4.68 and the 5 year arm rose from 4.73 to 4.75. The 1 year arm fell from 4.78 to 4.72. What is also interesting is that when rates were at their lows a few months ago the 5 and 1 year arm was higher than the 30 year fixed rate, which is highly abnormal. Since the 30 year rate has gone up (and the arms have stayed down) the 30 year rate is now above both arms. And now the spread between the 30 year rate and the arms is back to normal. Below are the rates for the different mortgage products for the last few weeks and for January 15 (6 months ago).

Aug 13, 2009 30-yr 5.29 15-yr 4.68 5-yr ARM 4.75 1-yr ARM 4.72

Aug 06, 2009 30-yr 5.22 15-yr 4.63 5-yr ARM 4.73 1-yr ARM 4.78

Jul 30, 2009 30-yr 5.25 15-yr 4.69 5-yr ARM 4.75 1-yr ARM 4.80

Jul 23, 2009 30-yr 5.20 15-yr 4.68 5-yr ARM 4.74 1-yr ARM 4.77

Jul 16, 2009 30-yr 5.14 15-yr 4.63 5-yr ARM 4.83 1-yr ARM 4.76

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Jan 15, 2009 30-yr 4.96 15-yr 4.65 5-yr ARM 5.25 1-yr ARM 4.89

In addition to rates it's always interesting to look at actual mortgage payments. We took today's rates and using a mortgage calculator translated them into a payment for a 200k mortgage. We also did the same thing with rates from July 30, 2009 (2 weeks ago) and January 15, 2009 (6 months ago).

Aug 13 30-yr $1109.36 15-yr $1548.44 5-yr ARM $1043.29 1-yr ARM $1039.68

Jul 30 30-yr $1104.4 15-yr $1549.47 5-yr ARM $1043.29 1-yr ARM $1049.33

Jan 15 30-yr $1068.75 15-yr $1545.36 5-yr ARM $1104.4 1-yr ARM $1060.23

As we can see that while rates have risen the effect on a mortgage payment (looking at the 30 year fixed rate) is relatively small.

So what is our advice to potential buyers looking for a mortgage? I would start the process of looking for a lender/mortgage early on. Financing is stricter than it has been in the past and its good to start the process early so any potential problems can be resolved (i.e. credit report problems or extra documentation that is needed). Additionally, with a possible spike in inflation looming there is more of a risk of rates rising than falling so it makes sense to lock in early.