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Recuperating economy elevates mortgage rates

Polyana da Costa

Mortgage rates jumped this week as the job market improved, consumer spending increased and the economy gained momentum.

30 year fixed rate mortgage 3 month trend

30 year fixed rate mortgage 3 month trend

The benchmark 30-year fixed-rate mortgage rose to 3.85 percent from 3.73 percent, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index stood at 4.15 percent; four weeks ago, it was 3.79 percent.

It's the highest the 30-year fixed has reached since August.

The benchmark 15-year fixed-rate mortgage rose to 3.03 percent from 2.96 percent. The benchmark 5/1 adjustable-rate mortgage rose to 2.82 from 2.68 percent.

Weekly national mortgage survey

Results of Bankrate.com's March 13, 2013, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

30-year fixed 15-year fixed 5-year ARM
This week's rate: 3.84% 3.03% 2.82%
Change from last week: +0.12 +0.07 +0.14
Monthly payment: $773.53 $1,141.84 $679.73
Change from last week: +$11.26 +$5.55 +$12.23

Rates climbed immediately after the Commerce Department released its closely watched monthly employment report last week. U.S. employers created 236,000 jobs in February, more than economists had expected. The unemployment rate fell to 7.7 percent from 7.9 percent.

Why rates are rising

"Overall, there's very strong consumer confidence at the moment," says Jordan Roth, senior branch manager for GFI Mortgage Bankers in New York. "They are seeing rallies in different markets."

Retail sales, a key measure of consumer spending, also rose more than expected in February. Sales increased by 1.1 percent, the largest increase since September, according to a report released Wednesday by the Commerce Department.

Confidence in the economy makes investors want to move money out of safer assets such as mortgage bonds and U.S. Treasury notes to seek riskier, higher returns on investments. When demand declines for government and mortgage bonds, mortgage rates tend to rise.

Although the recent jump in rates is more noticeable, this upward trend started a couple of months ago, says Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich.

"I've been telling my customers now for a couple of months that rates seem to be going two steps forward and one step back," she says. "They are inching their way up."

With the increase in rates, fewer homeowners are trying to refinance their mortgages. The volume of refinance applications decreased 5 percent last week, compared to a week earlier, says the Mortgage Bankers Association. The volume of purchase applications decreased 1 percent but was 9 percent higher than the same week one year ago.

"The ups and downs of mortgage application volume the past few weeks (are) no reflection on the larger picture of an improving housing market," says Bob Walters, chief economist for Quicken Loans. "Chances are the drop in mortgage applications is tied to rates ticking up due to a better-than-expected unemployment report that showed the job market is improving, removing investor desire for safer assets."

How high will rates go?

If the economy continues to improve, rates could reach 4 percent or slightly higher by summer, Roth says.

But even at those levels, rates would still be attractive for buyers and refinancers, he says. Last year, a 4.15 percent rate was a record low.

"Unfortunately, people always want what they couldn't get," he says.

The Federal Reserve has artificially kept mortgage rates low for a while now. Eventually, rates will creep back up into the 5 percent range, Leyrer says. It won't happen overnight -- but slowly, rates will rise to "normal" levels.

"We can't sustain a viable economy with rates staying so low," she adds. "Unfortunately, people think now that if you are up into the 4 (percent) or 4.5 percent, it's terrible but it's really not."

The higher rates may deter homeowners who refinanced last year and already have somewhat low rates from refinancing again. For those who need rates to drop back to record-low to grab a refinance deal that makes financial sense, Roth says keeping your paperwork ready in case rates drop will help speed up the process.

"They should be prepared to act appropriately, accordingly and expeditiously," he says. In the unlikely event that rates drop back to record lows, homeowners may have a small window to move, he says.

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