Mortgage interest rates tiptoe upward as investors gain confidence

Mortgage rates inched up this week as investors gain confidence in the economy and banks signal they have strengthened their systems enough to weather another recession.

The benchmark 30-year fixed-rate mortgage rose 4 basis points this week, to 4.15 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 4.91 percent; four weeks ago, it was 4.1 percent.

The benchmark 15-year fixed-rate mortgage rose 4 basis points, to 3.38 percent. The benchmark 5/1 adjustable-rate mortgage rose 11 basis points, to 3.14 percent.

"If the economy keeps chugging along, rates could really take off," says John Walsh, president of Total Mortgage Services in Milford, Conn.

Good economic news

Two key economic indicators signaled to investors this week that the economy might be coming out of the woods. Retail sales figures released Tuesday showed that consumers spent more in stores in February, as sales rose 1.1 percent compared with January. It may seem like a small change, but that's the biggest gain in five months, according to figures from the U.S. Department of Commerce.

The economy added 227,000 jobs in February, according to a report released last week. While the unemployment rates remains high and stalled at 8.3 percent, the report shows the labor market has improved for three months in a row.

The Fed also painted a somewhat positive -- or at least not as negative -- picture of the economy after the Federal Open Market Committee met this week.

Stronger banks

Another factor that fueled investors' confidence was the Fed's stress test for banks. The Fed evaluated whether banks would have sufficient capital to operate normally and enough money to lend to consumers and businesses during a "severe" economic crisis. Of the 19 banks evaluated, 15 passed the test.

"The idea that these banks are more financially sound" certainly put pressure on rates this week, says Michael Becker, a mortgage banker at WCS Funding .

As investors gain confidence, they target riskier investments such as the stock market, and that usually means higher rates.

"You're seeing money pulled out of the bonds market and going into the stock market," says Derek Egeberg of Academy Mortgage in Yuma, Ariz.

"I've seen interest rates go up three-eighths of a percent in a day and never look back," Walsh says. "Or go up a half of a percent in a very short period of time. Anything can happen."

"I'd be shocked if rates hit 5 percent anytime soon," Egeberg says. "I think we are going to be on the high 4s fairly quickly though."