Underwater Borrowers Beware: Mortgage Interest Rates are Rising

Mortgage interest rates are rising. For the sixth consecutive week, interest rates have ticked upward, according to Freddie Mac. As of June 13, a 30-year fixed rate mortgage has increased over half a percentage point, averaging 3.98 percent, up from last week when it averaged 3.91 percent. A 15-year fixed rate mortgage averaged 3.10 percent, up from last  week at 3.03 percent.

Cheap financing has helped fuel the nascent housing recovery. But will rising rates derail the fragile real estate revival? If interest rates continue their uphill ascent, mortgages will become more expensive and underwater homeowners will be unable to refinance. With 11.3 million borrowers underwater this could become a sizable issue.

“With the ongoing run up in fixed mortgage rates, adjustable-rate  mortgages (ARMs) are becoming more popular among homeowners looking to refinance and for home purchasers,” said Freddie Mac’s chief economist Frank Nothaft.

Interest rates have remained so low for the past four year because of the Federal Reserve’s stimulus program known as quantitative easing — or QE. Most Keynesian economists have claimed that QE has helped stabilize the housing market and the economy as a whole. Each month the Fed has purchased $85 billion worth of Treasury bonds and mortgage-backed securities, which has helped inflate the stock market.

Critics of QE, who subscribe to the Austrian school of economists, argue that spending more than a trillion dollars a year to stabilize housing and the economy is a risky mistake.

Recently, Fed Chairman Ben Bernanke has suggested that the central bank may start slowing its bond buying. New York bond buyers have begun to sell their Treasury bonds, sending yields on the bonds upward. Since interest rates are closely correlated to Treasury bonds, expect interest rates to move above 4 percent sometime soon.

Though mortgage rates remain low by historical standards, the ultra-cheap mortgages have helped lure buyers back into the market and worries have crept in that higher rates could disrupt the still young housing recovery. If higher interest rates put a damper on homebuyer’s newfound enthusiasm, it could eventually mean slower sales — and less refinancing.

If you’re underwater you may want to consider refinancing now.

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