Are rising mortgage rates a hint of what's in store for 2013?

December 12th, 2012

Mortgage interest rates inched upward to start December. Is this a preview of what's in store for 2013?

Setting the stage

Mortgage rates have had a remarkable year. According to mortgage finance company Freddie Mac, after starting 2012 at around 4 percent, 30-year rates fell to an all-time low of 3.31 percent as of November 21. That was during Thanksgiving week, appropriately enough for the many home buyers and refinancers who have benefited from these low rates.

Longer term, the performance of mortgage rates is even more impressive. Barring a sharp reversal in rates in the last few weeks of the year, 2012 looks like it will be the seventh consecutive year in which 30-year mortgage rates have ended the year lower than when the year began.

Reading a mortgage calculator

Against this backdrop of persistently falling mortgage rates, the fact that 30-year rates rose by one basis point at the end of November, and then by another two basis points at the end of December, seems like barely a ripple. Run that increase in rates through a mortgage payment calculator, and it would barely register a change in the projected monthly loan bill. However, here are three reasons prospective home buyers should not get complacent about mortgage rates:

  1. Even small differences add up. A few basis points may not make much of a difference on a monthly payment calculator, but if you project those differences over the course of 30 years -- 360 monthly payments in all -- even slight differences add up to meaningful amounts of money.
  2. The increase may be part of a bigger pattern. From faster economic growth in the third quarter to encouraging early reports on holiday shopping, there are indications that the economy is turning upward -- something that is likely to push rates higher as well.
  3. Housing prices are rising too. Higher rates aren't the only thing that can shake up the results on a mortgage calculator. According to the S&P/Case-Shiller Home Price Indices, housing prices have now risen for eight straight months.

Borrowers have seen rates move in their favor for about seven straight years now. However, the nature of financial cycles is that the longer and further things move in one direction, the more extreme the reaction in the opposite direction can be once it finally comes.

Posted By :

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.

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