Interest Rates Rise Suddenly, Say Mortgage Bankers
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The Mortgage Bankers association is reporting that mortgage rates moved up sharply during the past week.
___ “The average contract interest rate for 30-year fixed-rate mortgages increased to 5.25 percent from 4.81 percent, with points decreasing to 1.02 from 1.28 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The 44 basis point increase in the 30-year rate was the largest since a 48 basis point increase in October 2008.”
___ “The average contract interest rate for 15-year fixed-rate mortgages increased to 4.8 percent from 4.44 percent, with points decreasing to 1.10 from 1.16 (including the origination fee) for 80 percent LTV loans.”
___ “The average contract interest rate for one-year ARMs increased to 6.61 percent from 6.55 percent, with points increasing to 0.15 from 0.12 (including the origination fee) for 80 percent LTV loans.”
Interest Rate Rise Examined
If you look at these numbers carefully you can see three things: First, rates for the week are plaining on the increase. Second, what happens in a week is not a trend. Third, the rate increase is not as steep as it seems.
Let’s take a look at 30-year fixed rate loans.
We went from 4.81 percent with 1.28 percent to 5.25 percent with 1.02 points. A point is equal to 1 percent of the mortgage amount so for a $100,000 the cost of one point would be $1,000.
Notice that interest rates went up but points went down.
Apples To Apples
To compare apples to apples, let’s convert those points into interest rates. The usual equation is that one points equals one-eighth of a percent (.125) over 30-years. (Most mortgages, of course, do not last 30 years, which means the effective interest rate for one point is higher than .125 percent.)
To start we have 4.81 percent plus 1.28 points. Convert the points (1.28 x .125) to interest and we get .16 percent. Add 4.81 percent and .16 for a par rate of 4.97 percent. (Par is the interest rate with no points.)
The new rate is 5.25 percent plus 1.02 points. We convert the points (1.02 percent x .125) to interest and we get .1275 percent. Combine the interest rate (5.25 percent) plus the value for points (.1275 percent) and the new rate at par is 5.3775.
The Real Rate
In reality, we went from 4.97 percent to 5.3775 percent at par for fixed-rate loans. That’s a difference of .4074 percent — in a week.
Don’t panic — let’s see what happens in a few weeks. But we could be seeing the end of historically-low rates in exchange for rates that are close to historically low. That still isn’t bad.
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