30-Year Mortgage Rates Are Starting to Rise Again

Current Mortgage Rates

Those 3% mortgage rates were nice while they lasted. Within the space of just one month, the 30-year mortgage rate has gone up by more than one percentage point. Just a couple of weeks ago, the rate rose by a quarter point in one day.

This left some lenders quoting rates as high as 4.87% for a 30-year fixed mortgage. At the beginning of June, the rate stood at 3.65%.

What’s behind the increase

“The market has been so stable for the past two years,” said Kim Neilson, who is the executive vice president at McCue Mortgage in New Britain. “We haven’t experienced this type of jump in years.”

She added that she would be “highly surprised” if 30-year, fixed rate mortgages dropped to less than 4 percent any time this year. But she doesn’t expect rates to rise above 5% this year, either.

The rising rates are the result of a stronger economy, Federal Reserve monetary policy, and a housing market that is starting to bounce back after the recent recession.

Single-family home sales for the month of May reached levels not seen since 2010. This is especially important because in 2010, the federal government created an incentive to purchase a home with a tax credit.

Adverse effects

The recent spike in mortgage rates could adversely affect the recovery of the housing market. Many borrowers will evaluate the ramifications of higher mortgage rates.

“When something goes up that much, it is too much, too soon,” said Michael Menatian, who is president of Sanborn Mortgage in West Hartford. “It’s like sticker shock.”

A monthly payment on a $200,000 30-year, fixed mortgage at 3.6% is $909 per month. That same mortgage at 4.8% is $1,049. That’s a difference of $140 per month, not including fees associated with real estate taxes, escrow, insurance, and POA.

The rise in rates has already caused a drop in refinancing. Further, people who obtained mortgages with adjustable rates will start to notice a significant increase in their monthly payments as well.

The recent increase in rates also has some home builders worried. They see an excess of inventory if the higher rates dampen the real estate recovery.

“It’s always a concern when rates go up,” said Joanne Carroll, who is a spokeswoman for the Home Builders Association of Connecticut. “For every percentage point or part of a percentage point, you have the possibility of disqualifying people who are on the edge, like first-time home buyers.” She adds that there likely won’t be serious setback in new construction unless rates rise above 6%.

According to Robert Bischoff, publisher of the Connecticut Bank Rate Recap in Clinton, rates will continue to rise. “But these rates shouldn’t deter house hunters,” he adds. “They’re still fabulous, just not the bargain basement of the past two years.”

How rates are set

Mortgage companies set their rates according to the yield on the 10-year U.S. treasury bond. Recently, that yield rose by about a quarter percentage point in one day, which is why the average 30-year, fixed-rate increased by the same amount on that day. That was a hike not seen since August 2011.

The yield on the 10-year bond, also known as its return on investment, rises because a stronger U.S. economy means that the federal government must raise rates on its bonds to attract investors. Without the higher yield, investors are more likely to opt for investments in the private sector, where they’ll find a stronger return on investment.

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