News of increase in employment sparks ascension in mortgage rates

Mortgage rates have risen for the fourth week in a row and are near where they were in mid-February.

The benchmark 30-year fixed-rate mortgage rose 6 basis points to 6.31 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 0.27 discount and origination points. One year ago, the mortgage index was 6.56 percent; four weeks ago, it was 6.16 percent. On Feb. 14, it was 6.32 percent, and it hasn't been that high since.

The 15-year fixed-rate mortgage rose 7 basis points to 6.04 percent. The 5/1 adjustable-rate mortgage rose 5 basis points to 6.17 percent.

This week, the March employment report caused rates to rise.

The Labor Department announced Friday that nonfarm payrolls grew by 180,000 in March. That was quite a bit better than the 135,000 that had been expected. The unemployment rate fell, too, to 4.4 percent.

Positive job news creates mortgage rate increase

Better-than-expected employment news translated into an immediate bump in Treasury yields and long-term interest rates as investors pulled money out of bonds and put them into stocks.

To lure buyers, bond prices fell and yields rose -- and those higher yields filtered into the mortgage market, resulting in higher rates for home loans.

Bankrate's weekly survey was completed before the Wednesday afternoon release of the minutes of the Federal Reserve's March 20-21 rate policy meeting.

Those meeting minutes probably would have boosted the Bankrate index even higher, because they showed that members of the Fed's rate-setting committee are worried about inflation.

According to the minutes, the rate-setting panel's members believed that "the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path.

"Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee's predominant concern."

Housing worries

The Fed also has its eye on a possible slowdown, brought on -- or at least made worse -- by the slumping housing market and the tightening standards for subprime mortgages.

The National Association of Realtors is worried about the housing market, too.

The trade group forecasts that the number of houses resold will decline 2.2 percent this year compared to 2006, and that the number of new homes sold will fall 14.1 percent.

The NAR estimates that prices won't fare as poorly: It predicts that the median price of resold homes will fall 0.7 percent this year, while the median price of new homes will rise 0.4 percent.

Translated into dollars and cents, that means if the median price of a house resold in your established neighborhood was $200,000 last year, the median price would be $198,600 this year. If you live in a new development, last year's $200,000 new home would cost $200,800 this year.

Consumers spurn ARMs

For months, the Realtors have been encouraging buyers to get fixed-rate mortgages because of concerns about payment shock when ARM rates are reset.

The NAR's chief economist, David Lereah, beat that drum this week: "Simply stated, a loan with the lowest monthly payment probably isn't in your best interests -- borrowers need to understand worst-case scenarios," he said in a news release.

He encouraged ARM holders to refinance into fixed-rate loans.

Borrowers don't need much of a push. Last week, 18.7 percent of mortgage applicants asked for an adjustable-rate mortgage.

Consumers haven't spurned ARMs like this since July of 2003.

"Some days, a 3/1 ARM will be priced worse than a fixed rate," especially when you take discount points into account, says Jim Sahnger, a mortgage consultant with Palm Beach Financial Network in Stuart, Fla.

For people getting conforming mortgages (loans for less than $417,000), the differences between ARM rates and fixed rates are so small that there's not much incentive to go with the ARM, Sahnger says.

That's especially true for borrowers who expect to stay in the house for more than three to five years.

Where Sahnger does business, in South Florida, house prices have been falling, and people aren't buying houses unless they plan to live in them for several years.