Many American homeowners are likely kicking themselves for missing what was likely the market bottom for mortgage interest rates in the late first quarter of 2008. After dipping to historic lows as the central bank quickly cut the Fed funds, average mortgage rates have climbed sharply in the last few months. Much of the rise has taken place in just the last few weeks as indications are stronger that rate hikes are likely coming later this year to fight growing inflation.

According to Bankrate.com, the Tuesday’s (June 17) national average rate for a conventional 30-year fixed rate loan is 6.36 per cent. This is over a full percentage point higher than the lows of February to March. While this rate is still relatively low compared to historic rates, aggressive buyers who waited around for rates to go lower had little time to react once rates started to climb. Many banks, including Wells Fargo and US Bank have 30-year fixed rate loans with zero points and offered on their web sites above 6.5 per cent.

Homeowners most affected by the low mortgage rates were borrowers with manageable mortgages and decent credit who wanted to take advantages of the interest rate dip. The millions of homeowners who faced foreclosures and who are struggling with sub-prime mortgage problems have generally not been in a favorable position to get the best loan rates and terms. Thus, the already well-position borrowers have benefited the most financially from reduced rates. Businesses have had a good opportunity to expand through low cost building financing as well.

Although mortgage rates have risen, there are still many great deals on the market for home equity loans. Many banks are still promoting home equity loans and lines of credit as low as five per cent for borrowers with great credit. This presents a great opportunity for borrowers seeking funds to consolidate higher interest debt, repair or renovate their homes, start or expand businesses, and more. Tax deductible interest rate opportunities available with some uses of home equity loans make them an incredibly low cost financing option for many people.

Credit card rates are also still fairly competitive as the Fed fund rate remains at one per cent for the moment. Although each depends on multiple financial market factors, generally, mortgages tend to move based on expectations of pending rate moves, while equity loans and credit cards are more relative to current Fed fund rates and respond more in synch with Fed moves. Thus, the strong upward moves in mortgage rates are based on growing inflation concerns which have prompted many to suggest a reversal of rate cuts is likely later this year. Some have even suggested the central bank meeting later this month could offer the first rate hike. The majority of analysts believe it will be a little later before rates are raised.

The good news for the US economy is that data seems to show that many new home buyers and others took advantage of the low rate financing. Also, many home owners overwhelmed mortgage consultants with high demand for mortgage refinances during the first part of the year.

Inflation does continue to alarm the Administration and central bank members. Federal Reserve Chairman Ben Bernanke has hinted a few times lately that his focus has shifted to addressing rising oil, gas and consumer prices. Oil dipped a bit today and recent data and news have shown an effort to control out of control oil prices. However, national retail gas prices continue to settle higher over $4 per gallon. Additionally, severe floods have wiped out much of the corn crop in the Midwest US. Ethanol, made from corn, is required in US gasoline. Increased prices for corn and ethanol will only add to gas prices. Some have been quick to call for $5 gas by the end of the summer.

Market Recap

Stocks were well-mixed Monday on a wild day in oil trade. After setting a new record high near $140 per barrel, oil futures dropped sharply on reports of a Saudi boost in oil production. The Dow dropped 38 points but the NASDAQ climbed 20 points. Stocks fell sharply Tuesday after disappointing data on wholesale inflation. Oil prices dipped slightly but retail gas was higher. The Dow dropped 108 points, with the NASDAQ and S&P down 17 and 9 points. Earnings were a mixed bag with Goldman Sachs slightly better than expectations but Best Buy disappointing.

Neil Kokemuller
Tuesday, June 17, 2008
8:08 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.