Rates are Headed Up

Mortgage rates are on the rise. This shouldn’t be a big surprise to anyone following the financial markets for the past year. In June, mortgage rates hit a 42 year low. Since then they have been inching up off those lows. Last week (the week of July 14) with the announcement of a new record Federal budget deficit of $450 billion, mortgage and long-term rates soared. To give you some reference numbers, in June it was pretty common for a 30-year fixed rate conforming loan to have a 5.25% fixed interest rate for 0 points. As of today, that rate is 5.75%.

The explanation of all this is guaranteed to put you to sleep; however, with all of the calls I have received in the past week asking “why?” here is the condensed version.

The cause and effect is basic economics: supply & demand with the supply being the available money to loan to the government, and the demand being how much money is needed by the government. When revenues (taxes) are insufficient to cover spending, the US Treasury must go into the market and borrow the amount that it needs to fund that spending. The larger the demand (the bigger the deficit) for the money, the higher price (interest rate) a lender will demand & receive. Couple the Federal deficit with the states’ deficits and you can see the enormous pressure being put on lending rates.

It is no surprise that the Federal Reserve has lowered short-term (1year or less) rates, and has stated that it will maintain these rates for the foreseeable future. If they were to raise short-term rates, the costs to the government would increase even further and the deficit would grow even bigger. Since all adjustable rate mortgages are based on an index, and this index is almost always a short-term rate, adjustable rate mortgages may be your best value in a mortgage. That is until the economy finally begins to recover.

Fixed Rate mortgages for conforming loans (under $322,700) as of 7/21/03 (p.m.) at the 0 point option are:

30 year: 5.75% (APR 5.83%) payments are $1,883.19/mo.
15 year: 5.25% (APR 5.38%) payments are $2,594.11/mo.