Mortgage rates flat this week; expect slow rise in 2004
By Holden Lewis • Bankrate.com

It is the nature of a roller coaster to start at a certain elevation, go up and then plunge down, and end up at the same place where it started. In 2003, mortgage rates took a roller coaster ride -- one of those kiddie coasters for toddlers and the timid.

The year 2004 won't resemble a roller coaster ride. Instead, experts believe, it will look more like a leisurely walk up a modest hill.

The average rate on a 30-year, fixed-rate mortgage began 2003 at 5.96 percent, and that's close to where the average mortgage rate was at the end of 2003. Specifically, the benchmark 30-year fixed-rate mortgage rose 2 basis points this week to 5.88 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 0.37 discount and origination points.

The 15-year fixed-rate mortgage rose 1 basis point to 5.18 percent. The one-year adjustable-rate mortgage was unchanged at 3.87 percent.

If you look at where rates stood at the beginning and end of 2003, it looks like nothing much happened. But there were peaks and valleys. Starting at 5.96 percent, the average 30-year rate gradually declined, in fits and starts, to a 46-year low of 5.28 percent in June. Less than two months after that low point, rates were more than a full percentage point higher, and peaked at 6.47 percent in September. Then rates declined and hovered just above and below the 6 percent mark for the final three months of the year.

Experts think 2004 will play out differently. They see a long, gradual increase in mortgage rates. The long-lived refinancing boom, which isn't dead yet but is feeling quite ill, will finally kick the bucket in 2004. As a result, tens of thousands of mortgage brokers and loan officers will join the unemployment line. Those who remain employed will hawk hybrid adjustable-rate mortgages for home buyers who got accustomed to mortgage rates under 6.5 percent. To homeowners, mortgage lenders will aggressively promote home equity debt as a way to consolidate other outstanding debts and get them under control.

Experts generally believe that 30-year mortgage rates will end 2004 at between 6.5 percent and 7 percent -- a gradual, fairly small rise. Doug Duncan, who is one of the most cautious prognosticators as well as one of the most accurate, predicts that the average 30-year rate will be about 6.5 percent at the end of 2004. He believes they will rise to between 7.2 percent and 7.4 percent at the end of 2005.

Duncan bases his prediction on today's low inflation (by one measure, just 1.6 percent in the 12 months ending in November) and Federal Reserve officials' statements that the central bank is in no hurry to increase short-term rates. The federal funds rate has stood at 1 percent since June 25.

"The Fed has said that they're staying on the sidelines for a long time, so we're going to believe that," Duncan says. "Our view is that it's likely to be at least until mid-year, or perhaps August or later, before the Fed boosts interest rates."

Dave Herpers, director of consumer affairs for mortgage lender Amerisave, predicts that rates "will bump around the 5.5 to 6.5 percent range, with an occasional spike to 7 percent." He believes that, as long as fixed-rate mortgages stay below 7 percent, people will continue to buy houses at an extraordinary pace.

He also believes that mortgage lenders, ever hungry for sales leads, will form partnerships with builders, real estate agents, insurance agents -- even lawyers and financial planners. So your next mortgage might be sold via your financial adviser.

Tom Meyer, president of Homebuilders Financial Network, which operates in-house mortgage lenders for large builders, believes that rates will be close to 7 percent a year from now. That's a good rate, by historical standards, but some home buyers might balk at 7 percent because they have been spoiled by a long period of low rates. (The last time the average 30-year fixed rate exceeded 7 percent was the week of April 11, 2002, when it was 7.01 percent, and people were counting hanging chads in Florida the last time the average 30-year rate exceeded 7.5 percent.)

If long-term rates head for the 7 percent territory, lenders will be poised to offer hybrid adjustable rate mortgages. A typical hybrid ARM would sport a low interest rate for five years, then adjust annually after that. It's a good way to keep mortgage payments low, especially for buyers who expect to move within five or six years.

"There are ways to continue to make available to home buyers very low interest-rate opportunities," Meyer says. "And the mortgage industry is pretty creative."