The Case for Rising Mortage Rates

admin — Tue, 16 Sep 2008 17:38:16 +0000

Mortage rates is a common misspelling for Mortgage rates when you’re typing too quickly, I know because I’ve done it many times :>)

Now, let’s talk about mortgage rate predictions. Currently mortgage rates are at historically low levels even though they’ve been creeping upwards for the past two years. Predictions were that mortgage rates would begin to increase sharply after the November elections, but that may all be changing given the recent activity in the mortgage and banking world. We’ve seen the bailout of Fannie Mae and Freddie Mac as well as the Lehman Brothers failure and the possibility that the Federal Reserve will now be cutting interest rates again. We can hope that these things will keep mortgage rates low for the for-seeable future, but here are the arguments for rising mortgage rates.

1. Rising Inflation

We’ve all seen the price of gas, food and energy rising over the past 1-2 years and unless that slows down we’re looking at some fairly steep inflationary pressures. As these prices rise so does the rate of inflation and interest rates are tied into the cost of borrowing from credit cards to home loans and every other type of lending. If inflation continues to rise then so will interest rates and mortgage rates.

2. Falling US Dollar

The U.S. dollar has been weak for several years now and the sub prime lending crisis helped keep it down. Now that this has also spread into the prime lending markets and is affecting the entire U.S. banking and financial markets the rest of the world views the U.S. as unstable which will further weaken our currency. In order to attract investors to the U.S. dollar and stop it’s downward spiral a higher return will need to be paid and this means rising interest rates.

Until we see the dollar strengthen and stabilize at higher levels we will continue to have upward pressure on the interest rate in the U.S. and thus on the mortgage rate here as well.

3. Increased Risk

Mortgage lending has become more risky in the past year or so due to sharply falling home prices throughout the U.S. Even the typical 20% down payment has not been enough to keep some home owners from losing all equity in their homes and ending up upside down on the loan. What were once considered prime mortgages are now showing up as defaults. In any financial market the response to higher risk is higher returns and this means interest rates on mortgages will rise to offset the increased risk.

The Bottom Line

These factors combined are more than enough to drive the historically low interest rates back up to levels where they are historically average or possibly even worse. While the bailout of the FHA loan backing Freddie Mac and Frannie Mae combined with a Fed that is cutting rates could save us in the short term, it is inevitable that interest rates will rise and take mortgage rates along with them. No matter how you spell it, mortage rates will rise and chances are it will be sooner rather than later.

Home Mortgage and Refinancing » mortgage rate predictions

The Case for Rising Mortage Rates