For the week ended May 30, the interest rate for the 30-year fixed-rate mortgage has climbed to the highest level in a year at 3.81 percent , based on data from the Freddie Mac weekly survey. Last week, the benchmark rate averaged 3.59 percent and 3.75 percent one year ago.
Since the beginning of May, when the average interest rate hovered near 3.35 percent, rates have risen half a percentage point. The 15-year mortgage averaged 2.98 percent, compared to 2.77 percent the week before and 2.97 percent last year. The 15-year fixed rate mortgage touched a low of 2.56 percent on May 2.
Strengthening economy pushing up rates
The Mortgage Bankers Association points to the recent rash of stronger economic Data” as the core reason for the rise in interest rates. For example, in mid-May, Bureau of Labor Statistics (BLS) reports that inflation , as measured by the Consumer Price Index (CPI) , remains in check as the rate declined 0.4 percent in April—meaning that the economy is not heating up too fast because of the Federal Reserve economic stimulus policy.
Home prices across the U.S. have recorded the best year-over-year gains since 2006, when prices reached their peak in July that year. According to the Standard& Poors/Case-Shiller Home Price Index, home values increased 10.3 percent for the first quarter (Q1) 2013 compared to QI 2012.
Where rates will go
Most economists agree that we may have seen the last of record low mortgage interest rates. Nonetheless, homebuyers and homeowners are still looking at good rates. Frank Nothaft, the vice president and chief economist of Freddie Mac said , “Even if rates are up half a percentage point, they are still unbelievably low."
"I think the low rates that we had seen over the last year -- I think that will be history," said Nothaft. The economist predicted that rates would begin to increase in the middle or the second half of 2013. He expects mortgage rates to climb near 4 percent this year , but maintain an average at current levels. Nothaft forecast that interest rates will climb above 4 percent in 2014.
The Federal Reserve is monitoring the economic data to determine. A stronger economy and lower unemployment rate---6.5 percent being the Fed benchmark-- could motivate the Fed to scale back its $85 billion a month bond buying program
It still pays to refinance
Cheap mortgage rates have been a major driver of the recovery in the housing makes a more borrowers—homebuyers and owners looking to refinance— can access low interest rates. Even with the increase in mortgage rates, the average rates remain at artificially low levels.
Homeowners looking to refinance their mortgages can still save money on their monthly mortgage payments. Generally, the “rule of thumb” for homeowners has been to refinance if interest rates decline by one percent. However, ‘the rules have changed,” said the director of Zillow Mortgage Marketplace Erin Lantz.
Lantz advise homeowners to evaluate to monthly savings, the costs to refinance and the length of time you plan to remain in your home. You need to be able to recoup the cost of refinancing the loan during the time you remain in the home to justify the transaction.
Regardless of the interest rate climate—declining or rising rates—you should shop and compare rates and terms. Make your final decision on a lender based on a combination of the lowest rate and the best terms . Large mortgage lenders tend to have the lowest fees and remember, you can negotiate lower fees with mortgage lenders to lower your closing costs.