No matter what type of real-estate move you may be considering, financing is a key issue. Whether it's buying a new home, selling the one you have, refinancing, consolidating debt using the equity in your home, or paying for home improvements, where and how to borrow the money is a prime factor.

And a major part of the financing question is the interest rate.

With this in mind, what is the outlook for mortgage and home equity rates in 2006?

Mortgage borrowers have a choice of a multitude of different products, but they often fall under one of two broad categories -- fixed rate or adjustable rate. Fixed mortgage rates and adjustable-rate mortgages, or ARMs, often move independently of one another, and plenty of evidence of that has been seen in recent years.

While adjustable rates are sensitive to the short-term interest rate target set by the Federal Reserve, fixed mortgage rates are closely related to yields on long-term government bonds. Longer-term economic prospects, for inflation in particular, and demand for U.S. bonds among overseas investors play the key roles in the movement of fixed mortgage rates.

Fixed-rate mortgages
Although fixed mortgage rates have moved higher from the sub-6 percent levels that were so prevalent from 2003 to 2005, rates are still low and conducive to home buying. The average 30-year fixed rate mortgage that is currently at 6.34 percent is likely to rise into the upper 6s in the second half of 2006. This is well below the average over the past 20 years of 8 percent. But rates will be very close to the average of the past 10 years of 6.9 percent and will be higher than anything seen in the past four years.

The average 30-year fixed-rate mortgage has been below 6.5 percent every week since July 2002. Although rates are still low for home buyers, the majority of refinance activity will involve borrowers moving out of adjustable-rate mortgages, referred to as "dis-ARMing."

Home buyers are currently favoring fixed-rate mortgages over adjustable-rate mortgages because the difference in initial rates is so slim. The current 30-year fixed rate averages 6.34 percent, while a 5/1 ARM is 6.08 percent and a 1-year ARM is 5.73 percent. As a borrower, why bear the risk of higher rates in the future without a substantive reward in the form of a lower rate?

Adjustable rates
How high those adjustable rates and monthly mortgage payments eventually go is dependent on how high the Federal Reserve raises short-term interest rates. Despite the changeover from Alan Greenspan to Ben Bernanke as head of the Fed, the focus on containing inflation will remain the primary objective. In other words, the Fed isn't done raising interest rates yet and chances are they will lean toward raising rates to contain inflation rather than holding rates down to foster economic growth. This is news that both current homeowners with adjustable-rate mortgages and new buyers considering ARMs will want to consider during the loan process.