Fed Moves Would Hit Consumers

Home Loan Rates Expected to Rise

For Michelle Higgins and her husband, John Kohan, the latest signals from Federal Reserve officials on interest rates are an encouragement to pay down the principal on their home equity line.

A half-point increase in rates will add $25 a month to the Silver Spring couple's payments, Higgins said. "It's not horrible," she said. "But it has encouraged us to try very hard to pay [the principal] off, or at least reduce it by half."

For most homeowners, particularly the millions who took out lower, fixed-rate mortgages in last year's unprecedented refinancing boom, an upward movement in rates will have little impact.

But for others -- those with certain adjustable-rate mortgages, construction loans or home equity products tied to short-term interest rates -- bigger monthly payments are almost certainly around the corner.

This week, Freddie Mac adjusted its interest rate and home-sales forecasts for the year, predicting that higher rates will drag sales below earlier predictions. The mortgage financier still predicts sales of new and existing homes will remain above last year's record 7.19 million.

"There's only a small portion of the mortgage marketplace that will be affected by the Fed starting to hike interest rates," said Keith Gumbinger, vice president of New Jersey-based financial publishers HSH Associates. "But those borrowers will soon feel the effects."

When rates hit 46-year lows last summer, 90 percent of the new loans taken out by homeowners were fixed-rate loans, said Frank E. Nothaft, senior economist at Freddie Mac. "American consumers are very savvy that way," he said. "They know a good deal when they see one."

Adjustable-rate mortgages, or ARMs, usually carry a lower rate upfront than do fixed-rate loans. They've become more popular as mortgage rates have risen in the past few months. Last week, according to the Mortgage Bankers Association, ARM applications accounted for 34.6 percent of all mortgage applications.

Average rates on 30-year fixed loans this week were 6.30 percent, up from 6.28 percent last week, according to Freddie Mac. A year ago, rates on 30-year mortgages averaged 5.21 percent. One-year ARMs this week averaged 4.14 percent, compared with 3.54 percent a year ago.

Most of the ARMs that consumers take out now are so-called hybrid loans, in which the initial interest rate is fixed for a relatively long period of time -- three, five, seven or 10 years. Those homeowners won't be immediately affected by rising rates.