The Real Cost of Rising Interest Rates
By: Brian O'Connell

NEW YORK (BankingMyWay) — Home mortgage consumers who’ve been sitting on the fence better hop off quick.

Thirty-year mortgage rates are up over the 4% mark, with the average rate hitting 4.076% last week, according to the BankingMyWay.com Weekly Mortgage Rate Tracker.

Worse, most large financial lenders (especially big banks) are starting to turn up the heat on home mortgage customers, sticking them with some of the highest rates consumers have seen in two years.

Consider Wells Fargo, which just upped its 30-year-mortgage rate for the second time in two months:

  • On May 22, Wells Fargo’s 30-year fixed home mortgage rate stood at 3.88%.
  • On Tuesday, the bank hiked it to 4.13%.
  • On Thursday, Wells Fargo lifted its rate to 4.50%.

What does that mean in real-money terms to mortgage consumers?

Take a look at this chart from the financial news site ZeroHedge.com, bylined by Tyler Durden.

It shows that as mortgage rates have risen, mortgage consumers looking at a $2,000 monthly mortgage payment can now afford a home for $395,000, as opposed to $425,000 before mortgage interest rates rose by 60 basis points.

That’s a 7% decline in the “amount of house” consumers can afford, Zero Hedge says.

As housing strengthens and demand grows for more mortgages, expect mortgage rates to keep rising. That’s especially true if the rate of inflation rises; it stayed low at 1.36% for May, according to InflationData.com, although that figure did rise from 1.06% from April.

So while lenders are upping their mortgage rates, economists such as Frank Nothaft, chief economist at Freddie Mac still say it’s a good time to buy a home:

Mortgage rates were relatively unchanged this week as market participants awaited the Federal Reserve's monetary policy announcement. The Fed stated that economic growth has been expanding at a moderate pace and that labor market conditions have shown further improvement, although the unemployment rate remains elevated. It noted inflation has been running below the Fed's longer-run objective as well.

The Fed also affirmed that the housing sector has strengthened further. For instance, single-family housing permits increased nearly two percentage points in May to an annualized pace of 649,000 homes, the most since May 2008. In addition, homebuilder confidence in June rose to its highest reading since March 2006.

It would seem the mortgage market is at a crossroads of sorts. Mortgage rates are rising, but they’re not at levels that would discourage buyers with ample cash and good credit.

But that’s just for now. If rates rise any higher, there’ll be a lot of empty seats on that home-buying fence — with buyers likely fleeing the market if rates go too high.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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