Are Mortgage Rates Finding Their Natural Level?

After rising from 3.35 percent to 4.46 percent from early May to late June, 30-year fixed mortgage rates settled down in the first three weeks of July. Does this mean that mortgage rates are finding their natural level?

Recent Changes - More on the Way?

According to mortgage finance company Freddie Mac, 30-year fixed mortgage rates transitioned from a steady climb to more of an up-and-down pattern in July, slipping back to 4.31 percent by July 25. Does this mean that mortgage rates have now leveled off? In other words, are mortgage rates of 4.25 to 4.50 percent a normal pattern?

Well, according to a number of historical measures, 30-year fixed mortgage rates are still below what might be considered normal. Plus, while the recent rise in mortgage rates seems extreme because it follows such a long period of falling rates, it really is not unusual.

Based on a LendingTree analysis of mortgage data from the Federal Reserve, the average absolute value of yearly changes in mortgage rates (i.e., the typical amount of change without regard to whether it was up or down) is about 0.90 percent. That's about the amount of change there has been so far in 2013, so while it may seem extreme, it's not. It would not be especially unusual for interest rates to rise even more over the next few months.

What to Do

The message here is that consumers should not get complacent and assume that interest rates have leveled off. Current mortgage rates may prove to be the best refinance rates and purchase rates you'll see in years.

More specifically, here some actions consumers should consider:

  1. Get a purchase mortgage or refinance quote now. The value of this is not simply to get into the market before rates rise. Getting a detailed quote may also help you identify something about your situation that would cause you to pay higher rates unless that problem is addressed.
  2. Compare multiple quotes. All purchase and refinance rates are not created equal. Shopping around early means that when you are ready to act, you'll know the best way to find the most competitive rates.
  3. Be wary of adjustable-rate mortgages (ARMs). ARM mortgage rates may look tempting, because they are lower than fixed mortgage rates. However, while ARMs may be suitable for specialized situations - especially when you expect to pay a mortgage off in just a few years - they are a risky choice for the typical long-term borrower. That risk is probably never more acute than when rates are low but starting to climb.
  4. Build up your down payment. While you are looking for a house, you should be saving diligently to build up your down payment. You can't do anything about market forces driving rates higher, but there are certain things you can control, such as the size of your down payment, which might qualify you for a lower rate.
  5. Work on your credit history. Again, while market forces are pushing rates higher, there are still things you can do to get the best refinance or purchase mortgage rate possible, and keeping your credit in good shape is one of those things.

What to Look for Next

Mortgage rates have paused after a sudden climb, but there is no reason to believe they are done rising. Here are some near-term economic announcements that could set rates in motion again:

  1. Advance estimate of second quarter GDP (July 31). From the Bureau of Economic Analysis, this is the first look at how the economy grew in the second quarter. A strong number (say 2.5 percent or above) could push rates higher. A weak number (1.5 percent or below) might cause rates to slip back downward. The market is likely to greet anything in between with a shrug of indifference.
  2. Employment report for July (August 2). Jobs remain the key to this recovery. Job growth picked up in the first half of the year, and this announcement from the Bureau of Labor Statistics will indicate what kind of start the second half is off to. If job creation builds on the momentum from the first half of the year, say with a new job figure in excess of 200,000 for July, rates could rise in response.
  3. Consumer Price Index for July (August 15). Another Bureau of Labor Statistics announcement, inflation is always important because interest rates are very sensitive to rising prices. June's inflation was a little high, and with oil prices continuing to rise in July, this announcement could indicate whether a new inflationary trend is emerging.

Besides these scheduled announcements, there is always the possibility that sudden developments could exert a new pressure on mortgage rates - particularly given the unrest in the Middle East and its relationship to oil prices and thus inflation in general. As far as mortgage-related news is concerned, it's going to continue to be a hot summer.


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