Mortgage rates hit four year highs -- Rates will go higher

July 12, 2006

On July 6, the average rate on a 30-year fixed-rate mortgage rose to 6.79%,  the highest in four years and 20% higher than a year ago. The 15-year fixed-rate rose to 6.44%, which was 20% higher than last year. The 1-year adjustable rate rose to 5.83%, which was a whopping 33% over last year.

What It Means:
Mortgage rates are driven primarily by increases in the Treasury Bond rate. These rates also increased significantly year over year: the 10 year Treasury Bond yield was at 5.19% on July 6, a 27% increase over last year’s yield. The 1-year Treasury Note yield was at 5.28%, a 50% increase over the prior year. (The 30-year Treasury Bond was reinstated in 2006, so no year-over-year comparison is available).

Treasury Bonds are sold by the U.S. Treasury at auction. The lower the demand for the bonds, the higher the interest rate the Treasury must pay to get buyers to bid. The largest buyers for these bonds are governments of foreign countries, most notably Japan and China. These countries are less likely to buy Treasury bonds as their own countries’ economies improve (Japan) and as they are allowing their currency to rise (China).

These trends indicate that Treasury Bond yields will probably continue to rise -- as will mortgage rates.

Action Steps:
Back in November 2005, we suggested you protect yourself against higher mortgage rates by switching into a fixed-rate loan. If you didn’t do it then, look into it -- adjustable-rate mortgages rose to 7% in the ‘90’s. Check with your mortgage broker to see if it is worthwhile for you, depending on how long you plan to stay in your home, and what type of loan you currently have.

Source: Freddie Mac web site, U.S. Treasury web site.