As Mortgage Rates Move, Headaches Follow

When Jennifer and Sam Lam put a contract in on a home in late April, they had timed the deal perfectly, with mortgage rates hovering under 5 percent. After an inspection revealed structural problems, it took the couple only a few weeks to find another place -- this one a three-bedroom, 2 1/2 -bath Capitol Hill rowhouse with a basement rental.

On May 27, they submitted their offer, only to learn that their good timing had apparently expired. The seller rejected their price, and mortgage rates rose almost three-quarters of a point in the following two weeks. They would have increased their offer, but couldn't anymore: The higher rates would have added a couple hundred dollars each month, which they could not afford.

Jennifer Lam said they are still looking for homes but have been forced to alter expectations. "We might be getting a house different in size and condition and location than we wanted," she said.

Mortgage rates move with the yield on 10-year Treasury notes, which spiked recently on investors' concerns about U.S. debt levels. The rate on 30-year, fixed-rate mortgages fell to historic lows under 5 percent in March, reaching 4.78 percent in April, according to Freddie Mac. It had more or less flattened until a few weeks ago, when it jumped to 5.59 percent from 4.91 percent in two weeks. Last week, the rate fell back to 5.38 percent. The rise has chased buyers from deals, motivated others to finally buy, and prompted some to pony up and pay for lower rates.

On a $250,000 loan, the two-week jump translates into about $100 more each month.

"I'm not sure now that the average consumer realizes how significantly rates have increased or the impact on monthly payments," said Brian Bonnet, president of Signature Mortgage Services.

Guy Cecala, publisher of Inside Mortgage Finance, expects rates to continue to move back toward 5 percent in coming weeks.

"The math just does not work for a lot of people," Cecala said. "If mortgage rates stay at their current level . . . it's going to put a big dent into the housing market going forward."

Tatjana Bajrami, a real estate agent with Long & Foster, said she has already seen two clients retreat from deals because of the impact of rising rates on monthly payments. Yet another was reconsidering a purchase but ultimately decided to go ahead despite the higher cost.

Because rates rose so quickly, buyers in the middle of the purchasing process were caught by surprise, Bajrami said, and in many cases chased from deals.

"The problem is this came too fast," she said. "If it came slower, over a period of time, we wouldn't feel it so much. You have to give it a little time to process."

For others, rising rates have had the opposite effect, serving as motivation. Concerned that borrowing would become even more expensive, some fence-sitters have jumped into a contract to lock in a rate.

"As soon as I noticed the interest rates were going up, it felt like it was time to move," said 27-year-old attorney Erin Wilcox. Wilcox put an offer last week on a one-bedroom, one-bath unit in an Adams Morgan rowhouse. The contract was ratified that Friday, and Wilcox locked in a rate on Monday. "Ideally, it would have been nice if this place would have come on the market two weeks ago."

Certain buyers -- those with upfront cash -- have chosen another path altogether and have purchased points to lower their interest rates, according to several brokers. One point, a type of prepaid interest, is equal to 1 percent of the loan amount and generally cuts a quarter of a percentage point off the rate. Points are paid for at closing.

"I'm having people openly asking the question now, 'What can we pay to get the rate back down?' " said Eric Gates, president of Apex Home Loans.

Typically, borrowers show more interest in points when mortgage rates are low, Gates added. It takes three to four years for buyers to recoup the cost of one point, he said, so when interest rates are higher, they tend to shy away from the upfront cost and look for chances to lock into a lower rate by refinancing down the road.

Even though rates have gone up the past few weeks, historically speaking they are still low. From 1972, the first full year for which Freddie Mac has data, through 2008, rates averaged about 9 percent. A year ago, they were above 6.4 percent.

"Realistically," Cecala said, "even though this isn't the mindset for a lot of people, 5 3/4 is not a bad rate to buy a home."