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Mortgage rates reach a significant landmark

February 14, 2011

| MoneyRates.com Senior Financial Analyst, CFA

30-year mortgage rates passed a significant landmark last week, rising above 5 percent for the first time since April of last year. Still, it's important to keep these things in perspective: current mortgage rates are still historically cheap.

Current mortgage rates: rising, but still a bargain

According to mortgage finance company Freddie Mac, 30-year mortgage rates reached 5.05 percent last week. Current mortgage rates are now more than 80 basis points (0.80 percent) higher than they were four months ago.

That's a steep rise, but lest that make current mortgage rates seem pricey, consider this: in roughly forty years of mortgage history, dating back to 1971, 30-year mortgage rates never got as low as the current 5.05 percent level until 2009. They've been as high as 18.45. So, in the scheme of things, 5.05 percent is still a very, very low mortgage rate.

It is important that potential home buyers get the right message: current mortgage rates have risen swiftly, but are still cheap. That should signal action rather than inaction, because the steep rise is a reminder that rates may not remain this low for long.

A disconnect from CD, savings, and money market rates

One other noteworthy thing about the recent rise in mortgage rates is that it is in sharp contrast to the lack of movement--upward movement, anyway--on behalf of CD, savings, and money market rates.

Why would banks raise mortgage rates but not rates on deposit accounts? In fairness, there is a fundamental difference. Mortgage rates are long-term in nature, while deposit rates are short-term. Moves in long-term rates may be more anticipatory in nature, because they have to reflect trends that may be in place for years. With a strengthening economy--and perhaps rising inflation--mortgage rates could not have expected to remain at their extreme low levels.

Of course, banks also know how their bread is buttered. Mortgage rates represent money coming into a bank, whereas deposit rates represent money they pay out. Is it any wonder they should be quicker to raise mortgage rates?

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