Mortgage rates starting to climb

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(MoneyWatch) While refinances have dominated the mortgage market recently, the trend may be waning as interest rates remain essentially flat.

The slow, upward creep in rates that many analysts have been predicting has started. Though it may be a long time before we see interest rates topping 5 percent, the trends suggest that rates have touched bottom,

Interest rates inched up week, with the 30-year fixed-rate mortgage averaging 3.56 percent, up from last week's 3.53 percent. Since the first week of 2013, rates have climbed up nearly a quarter of a percent.

While a quarter of a percent doesn't sound like much, it's a sizable jump that will cost borrowers thousands of dollars in extra interest over the life of their loans. Moreover, it marks a reversal of last year's trend, which saw 30-year mortgage interest rates fall about more than half a percent, from around 3.9 percent in January 2012 to 3.31 percent in November, the lowest interest rates in history.

This doesn't mean we're about to see interest rates skyrocket -- that would require sharply stronger economic growth -- but savvy market observers predict that rates are unlikely to return to their previous lows.

"Refinancing is definitely going to slow down," said Steve Cook, managing editor of Real Estate Market Watch. "There are two things that drive [people to] refinance. First is the drop in mortgage rates. Unlike buying a home, where there's a lot of personal factors, refinancing just depends on mortgage rates, and unless rates get a lot lower we'll see a slowdown in refinancing."

Cook says the second factor that drives borrowers to refinance is when home prices rise, and that is what mortgage lenders are hoping will extend the refi boom. When home prices rise, borrowers would normally tap the equity through a home equity loan or line or credit to pay for other purchases. But with more than 25 percent of borrowers still "underwater," rising home prices may not translate into a home equity-driven refi boom.

The latest numbers from the National Association of Realtors show that existing home sales and prices are continuing to rise. In some markets, homes are being snapped up quickly, spending an average of less than 27 days on the market, according to a recent NAR report.

Mark Monson, a branch manager at lender Primary Residential Mortgage, thinks that over the next six months or so, the mortgage market will shift toward a purchase mortgage market for the first time in years. "About 50 percent of our business over the last two years has been refis, but in the last few months we've seen more purchases," he said.

When interest rates were dropping, there was a rush to refinance. Now that rates are inching back up, home buyers could be looking to take advantage of historic low rates and low prices for the last time -- unless we are derailed by another recession.

Mortgage rates for the week ending Feb. 21, 2013

  • 30-year FRM averaged 3.56 percent with an average 0.8 point. Last year at this time, the 30-year FRM averaged 3.95 percent.
  • 15-year FRM this week averaged 2.77 percent with an average 0.8 point, the same as last week. A year ago at this time, the 15-year FRM averaged 3.19 percent.
  • 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.64 percent this week with an average 0.5 point, the same as last week. A year ago, the 5-year ARM averaged 2.80 percent.
  • 1-year Treasury-indexed ARM averaged 2.65 percent this week with an average 0.4 point, up from last week when it averaged 2.61 percent. At this time last year, the 1-year ARM averaged 2.73 percent.
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    Ilyce R. Glink is an award-winning, nationally-syndicated columnist, best-selling book author and founder of Best Money Moves, an employee benefit program that helps reduce financial stress. She also owns ThinkGlink.com, where readers can find real estate and personal finance resources.