The lowest mortgage rates in history may be behind us. Now what?

Posted by  on Jun 21, 2013

On the way to the lowest mortgage rates on record, there were several times when rates temporarily turned higher -- but these upticks didn't last long. However, logic dictated that 3.5 percent mortgage rates could not last forever. At some point, mortgage rates are going to make a sustained move higher. The question now is, has that move already begun?

Is this the big one?

According to mortgage finance company Freddie Mac, as of June 6, like 30-year mortgage rates had risen for five consecutive weeks. That stretch pushed those rates 56 basis points higher, to 3.91 percent. We may soon see 30-year rates above 4 percent for the first time since early last year.

Higher mortgage rates have a number of direct effects on how much house people can afford and whether or not it makes sense to refinance, but they also have some indirect impact on the dynamics of the mortgage market. Here are three examples of how consumers should look at mortgages differently now that rates have started to rise:

  1. Compare mortgage rates from multiple lenders. It always makes sense to shop around for the best mortgage rates, but it is especially important when rates are on the move, since different lenders respond to those changes in different ways.
  2. Watch spreads between 30-year and 15-year mortgage loans. Fifteen-year mortgage rates have risen along with 30-year rates, but not by as much. As a result, the spread between 30-year and 15-year mortgage rates has been widening. This increases the attractiveness of 15-year rates.
  3. Reconsider that ARM. Adjustable-rate mortgages (ARMs) bring the potential for variability to your monthly payments, and in a rising interest rate environment that variability is likely to work against you. ARMs can make sense under a variety of circumstances, and certainly anyone who has had an ARM over the last several years has benefited by seeing rates steadily reset lower. However, if mortgage rates have hit bottom and are on the rise, you may want to consider refinancing to switch from an adjustable to a fixed interest rate.

Rising rates will make the mortgage market more challenging for consumers; but if you understand the dynamics and act decisively, you can still do well in this environment.

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