Mortgage Rates Expected To Continue Their Climb

Mortgage interest rates have been near historic lows for the past three years, somewhat easing the pain of ever-rising home prices.

But now rates are edging up bit by bit, and economists predict that very low rates may be a thing of the past, at least for now. The Mortgage Bankers Association reported last week that interest rates had risen to the highest level since July 2002.

Rates for 30-year, fixed-rate mortgages averaged 6.32 percent this week, Freddie Mac said. Earlier this month, the rate hit a 2 1/2 -year high of 6.37 percent. The rates for adjustable mortgage have risen lately, too, with a one-year adjustable averaging 5.41 percent this week, up from 5.37 percent last week.

Douglas Duncan, chief economist for the Mortgage Bankers Association, said he expects rates on 30-year, fixed loans to go from about 6.25 percent to 6.5 percent or 6.75 percent in coming months, which he termed a "modest rise."

Prognosticators at the National Association of Home Builders expect similar increases, projecting that the rate for a 30-year mortgage will hit 6.5 percent this year and rise to 6.6 percent next year. They expect similar slight increases for one-year, adjustable-rate mortgages.

Economists try to forecast interest-rate trends by using mathematical models that take into account gross domestic product, employment, personal income growth, spending patterns, the rate of business expenditure and foreign investment. They also watch avidly for signs of activity within the Federal Reserve Board, which adjusts interest rates down to stimulate the economy or up to curtail inflation. The Fed is widely expected to raise rates by small amounts a few more times in coming months.

With all kinds of interest rates rising, adjustable-rate mortgages are becoming less popular than in the recent past. Last year, for example, more than one-third of borrowers selected variable-rate loans, assuming that interest rates would remain low and wanting to save money on their monthly payments. Adjustable-rate loans typically cost less, at least at first, but reset in the future to higher levels if interest rates rise. People can get walloped if rates rise a lot, as they did in the early 1980s and again in the early 1990s. It's a risk many borrowers have wanted to take when interest rates remained low. But now, with the prospect of increases in the future, more borrowers are opting for fixed-rate loans.

Last year, for example, up to one-third of borrowers chose adjustable-rate loans. But a recent survey by the Mortgage Bankers Association found that the percentage of people opting for ARMs had fallen to 28.8 percent.

Even so, Duncan said ARMs have become a standard fixture in the market, no matter what happens.

"Households have come to realize that they don't stay in their houses 30 years, but seven or eight years," he said. Borrowers opt for adjustable-rate mortgages that can rise only after that amount of time. "You'll always see a higher share of the market being in adjustables than in the past."