Are mortgage rates starting a new trend?
February 14th, 2013A funny thing happened to mortgage rates in January -- they went up. Is this a hint that 2013 might be the year when mortgage rates finally stop falling? As of yet, the rise in rates would cause only a minor change to the results of a mortgage calculator. However, to anyone planning to buy or refinance a house, the trend has to be a little worrisome.
The recent rise in mortgage rates
Mortgage rates reached an all-time low in late November, at 3.31 percent for a 30-year loan. They closed 2012 at just 3.35 percent; but by the end of January, they had taken a more definite step up, to 3.53 percent. To put all this in perspective, rates are still lower than they were a year ago, and lower than they spent most of 2012. Therefore, it's not what rates have done so far that should be cause for concern, but where rates are going.
What is going on?
One way to decide whether the recent rise in rates is a trend or an aberration is to figure out why rates are rising. What are mortgage companies reacting to? Here are two leading possibilities:
- Optimism about the economy. The financial markets started this year with a rush of optimism after the fiscal cliff solution was reached. That optimism has yet to be supported by economic data, but it could be enough to push interest rates higher, at least temporarily.
- Interest rate risk. Bankers taking a hard look at normal inflation and interest rate levels would have a hard time committing to lend money for 30 years at just over 3 percent. Eventually, this concern may force rates to reflect more of a safety cushion.
One thing is for sure -- mortgage rates this low are very unusual, and that means it won't take much to send them up from current levels.
New loan and refinancing calculators should be used to do more than readjust your calculations for recent changes in rates. You should use mortgage calculators to test possibilities for where rates might go -- specifically, in this case, to figure out how far rates could rise before they would change your buying or refinancing plans. That way, you'll know to start speeding up those plans if rates start to approach that threshold.
Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.
