Ashland Office Space

Could mortgage rates push past 7% by early summer?

It hasn't cost that much to finance a house in more than four years, but we are certainly headed in that direction.

That means many buyers will have to settle for smaller homes. Or sellers will have to settle for lower prices. Or both will have to give a little to reach a deal.

The latest indication that interest rates will continue to climb came earlier this week when the government reported that consumer prices rose fast, and faster than expected, in April.

Inflation like that is what prompts the Federal Reserve Bank to boost interest rates for everything from mortgages and credit cards to auto and business loans, in an effort to slow spending and hold down prices.

After raising rates 16 times over the past 22 months anyone buying or selling a home -- or facing big increases in their adjustable rate mortgage or credit card payments, for that matter -- might have hoped the Fed would ease up.

But despite all those rate hikes inflation is running at an annual rate of 5.1% for the first four months of the year -- considerably higher than the 3.4% increase for all of 2005.

Higher energy prices are the main culprit. And it's not just the extra money we spend at the gas pump. The inflation report showed higher energy prices are rippling through the entire economy, pushing up the price of many goods and services.

The Fed simply can't ignore that.

A 30-year fixed-rate loan the most popular way to finance a new house -- averaged 6.67% last week.

This time last year we were paying 5.84% and in June 2003 rates had plunged all the way down to 5.28% -- the lowest since Interest.com (and its ink-on-paper predecessors) began its weekly survey of major lenders in 1985.

You'll pay more for other fixed-rate loans as well, according to Interest.com's national survey of lenders:

*15-year loans averaged 6.3%, up from 5.42% one year ago.

* 30-year jumbo loans (for more than $417,000) averaged 6.86%, up from 6.02%.

Introductory rates for adjustable-rate mortgages, or ARMs, are rising even faster. Those 30-year loans offer a fixed rate for one to seven years. After that the rate is adjusted each year. If interest rates go up, you pay more. If they go down, you pay less. ARMs with an initial fixed rate for:

* Five years, averaged 6.35%, up more than one-full percentage point from 5.26% one year ago.

* One year, averaged 5.92%, up even more from 4.56%.

Here's what that means when you reach for your checkbook if you took out a 30-year, fixed-rate loan for $150,000 at:

* At today's rate of 6.67%, your monthly payment of principal and interest only would be $965.

* At last May's rate of 5.84%, your payment would have been $884 or $81 a month less.

* At June 2003's rate of 5.28%, your payment would have been $831 or $134 a month less.

David Lereah, chief economist for the National Association of Realtors, recently told USAToday that he expects the average rate for a 30-year fixed rate mortgage to reach 7% this summer.

And that was before Wednesday's inflation report.

The Labor Department said its Consumer Price Index rose 0.6%, driven by a 3.9% rise in energy costs. Economists cited in most media reports expected the index to rise 0.5%.

What's known as the core CPI, which excludes particularly volatile prices for things like gasoline and food, rose 0.3%. While some experts blamed a good part of that on energy prices driving up the cost of other goods and services, a spike in what the government calls "shelter" costs accounted for half of that 0.3% increase.

That primarily reflects rising costs of owning or renting a house or apartment. Some media reports put a big emphasis on this, suggesting that a growing number of families can no longer afford to buy a house and are now pushing up rental rates. That seems to be a bit of a stretch.

So let's be clear. The Fed is a very long way from pushing mortgage rates back into the double-digits, which is what we were paying back in the 80s and early 90s.

Over the past few years sellers could demand higher and higher prices for their homes, and buyers could still afford to pay them, because the cost of borrowing money was at or near record lows.

Now the market is changing and everyone needs to understand what's going on.

Borrowing is more expensive. Buyers can't afford to pay as much as they did last year, or just a few months ago. So prices have leveled off or fallen in many cities.

But if buyers and sellers realize what's going on and temper their expectations life can go on very nicely.

Source: Interest.com All rights reserved. Copyright Interest.com