Low Mortgage Rates Are Going, Going...

From the Wall St. Journal

Looking to refinance? If you haven't locked in, you may already be too late.

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  By BRETT ARENDS

  
  

• Comments (11)

If
you're looking for a new 30-year mortgage, last week's events from the
financial markets carry a very simple message: Get 'em cheap while you
still can.

Rates on conforming 30-year loans jumped dramatically in just a few
days, ending the week at an average of 5.27% according to Bankrate.com.
That's still OK by historic standards, but it's a jump from the levels
seen just a few weeks ago, when you could get loans at 4.75% or below.

The underlying cause isn't hard to find. Rising government debts,
and burgeoning hopes of an economic recovery, are pushing up long-term
interest rates on government debt. The yield on the 10-Year Treasury,
which was barely 2% near the end of last year, surged to 3.67% late
last week before settling back slightly. And that, in turn, pushes up
rates on other long-term loans.

What does this mean for you?

This surge in mortgage rates, if it continues, is ominous news all
around. It's bad for those trying to refinance an existing mortgage,
those looking to buy a new home, and those looking to sell their home.
It may also be bad for the stock market, and maybe even for the dollar,
too. More on that later.

For
those trying to refinance: If you hadn't locked in the rate already,
you are probably out of luck. You may be stuck with higher rates.

Ironically, if you were stuck crawling through the refi process when
the rates jumped, you may be a victim of new mortgage rules. These were
introduced in the last year to prevent another subprime scandal. They
have slowed down the loan approval process and have discouraged most
lenders from offering rate locks until other steps have been completed.
"Lenders are not locking in borrowers' rates until the (home)
appraisals are in," says Paul Sapienza, broker at Drew Mortgage in
Boston. Until last year you could lock in a rate while you refinanced,
or even looked for a new home. "That's over," Mr Sapienza says.

For those looking to buy a new home: Be aware this rate hike -- to
5.25%, from 4.75% recently -- can add quite a bit to your expenses. It
will cost an extra $50 a month for someone buying a typical $200,000
residence with an 80% loan.

Rates still look pretty reasonable, but now there's an extra level
of uncertainty in the process. Who knows where they will end up by the
time you come to sign?

Some borrowers are now looking instead at adjustable rate mortgages,
or ARMs. In some cases the initial rates are lower. Alas, we've seen
this movie before. ARMs are high-risk and in most cases a terrible
idea. They mean the lenders are transferring inflation and interest
rate risk to you. In this environment both risks are substantial.

And if you were looking to sell a new home, bad news too: This rate
jump adds about 10% to your potential customer's financing costs. Cheap
mortgage rates were one of the things tempting buyers into the market.
That is now in peril.

Why is this dangerous for the stock market? The rally in recent
months depends on the economy stabilizing, and then recovering. There
have been some hopeful signs in recent months. But of course the
consumer has benefited from at least two big doses of financial
adrenaline this winter: Refinancing gains and cheaper fuel. Both put
extra money in their pockets. Both now appear to be over.

It is two months since Federal Reserve chairman Ben Bernanke
unveiled plans to print money to buy up Treasury bonds. The aim was to
keep long-term rates down. He will have to step up the process. The
federal government may also wade back into the market for mortgage
backed securities with a similar strategy. The U.S. Mint will have to
move to a triple shift to print all the money.

Alas, there is only so far this can succeed. Treasury bonds are IOUs
of the federal government. But so are dollar bills. Ultimately the bond
market may notice that Uncle Sam is only paying off his IOUs with more
IOUs. Gamblers who do this tend to find their markers start trading at
a discount. When it does, neither is likely to command a premium.

Write to Brett Arends at brett.arends@wsj.com