Will the Mortgage Spike Hurt?

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There’s been some good news in the housing market recently, with prices and sales picking up. But there’s a fly in the ointment as well — mortgage rates are rising.

The average 30-year fixed-rate mortgage has gone up to 5.28%, from 5.143% a week ago, according to the BankingMyWay.com survey. The Federal Reserve’s exit from the mortgage-backed securities market is one factor, along with the improving economy.

But the increase, the largest since 2008, raises a question: will higher rates discourage buyers, dampening recovery in the housing market?

It’s probably too soon to become alarmed. At 5.28%, it would cost $5.54 a month for every $1,000 you borrowed, compared to $5.37 at the 5% rate of a few weeks ago. Monthly payments on a $300,000 loan would have gone from $1,611 to $1,662, the cost of one modest dinner out for Mr. and Mrs. Homeowner.

That’s not serious enough to drive home buyers to the sidelines.

But there’s no denying the fact that as rates go higher, shoppers have less to spend. For now, the threat of higher rates could be good for the housing market, spurring people to buy before rates go up more.

HSH Associates, the mortgage-tracking firm, notes that, “Underlying interest rates which influence mortgage rates continue to tick higher.” The 10-year U.S. Treasury note now yields about 4%, the highest since November 2008. The last time the yield was this high, 30-year fixed loans charged 6.38%. Market conditions are more favorable to low rates now than they were then, HSH says.

Still, rates seem more likely to rise than to fall.

It’s not uncommon for rates to rise by as much as three-quarters of a percentage point in the April to July period, HSH notes. With the Fed no longer propping up the mortgage market, traditional factors like investors’ views on inflation risks will again govern mortgages, HSH says.

Using slightly different survey methods, Moody’s Economy.com (Stock Quote: MCO) notes that the difference between the 10-year note and 30-year mortgage is about 137 basis points, or 1.37 percentage points. That’s the lowest spread since the late 1990s, with the average over the past 20 years around 160 basis points. That, too, suggests that mortgage rates could inch higher.

None of this is grounds for panic. Any rate below 6% is pretty good by historical standards.

But with rates more likely to go up than down, there’s no reason to postpone a home purchase or refinancing. Homes are at bargain prices in much of the country. The latest surveys show prices rising in many markets. Though the gains have been only slight, they should ease concerns about a double dip that could leave you with a home that’s worth less than you paid.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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