Mortgage rates hit 26-month high

Mortgage rates rose for the ninth week in a row after bond investors were scared over evidence that wage earners are making more money.

The benchmark 30-year, fixed-rate mortgage rose 5 basis points to 6.42 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 0.32 discount and origination points. One year ago, the mortgage index was 5.76 percent. Four weeks ago it was 6.1 percent.

The benchmark 15-year, fixed-rate mortgage rose 5 basis points, to 5.96 percent. The benchmark 5/1 adjustable-rate mortgage rose 4 basis points, to 5.94 percent.

The 30-year fixed rate hasn't been this high since Sept. 23, 2003, when it was 6.47 percent.

Most of the week's rise occurred Friday, after the Department of Labor released the employment report for October. Job creation wasn't anything to celebrate, as nonfarm payrolls increased by just 56,000. The news about wages was mixed, depending on whether you work for a living or invest in bonds.

The Labor Department says average weekly earnings jumped half a percent, to $549.93, in October. That was the biggest monthly increase since February 2003. It's good news for wage earners, but the bond market isn't happy when you get a raise because that could cause inflation. As a result, bond yields rise, and so do interest rates. That's what happened in the last week.

Rising rates are nothing new. Mortgage rates have been marching upward but not in lock step. Adjustable-rate mortgages have climbed faster than fixed-rate loans in the last couple of months. Rates on equity lines of credit have risen even more, albeit over a longer period. As a result, odd things have happened with rates, and some homeowners are taking advantage by refinancing into fixed-rate mortgages.

"What I'm finding is that people are trying to solidify their position for the next 10 to 30 years," says Ellen Bitton, president of New York-based Park Avenue Mortgage. Her clients are rolling all of their mortgage debt into 30-year, fixed-rate mortgages or adjustable-rate mortgages with initial fixed rates that last 10 years.

Normally, rates on adjustable-rate mortgages, or ARMs, are a lot lower than fixed-rate mortgages. At the beginning of 2005, the average 5/1 ARM was 68 basis points lower than the average rate on a 30-year fixed. This week the difference is 48 basis points. That makes the 5/1 ARM less attractive than it used to be when compared to the 30-year fixed.

A 5/1 ARM is an example of what's called a hybrid ARM. It has an initial rate that lasts five years, and the rate is adjusted annually after that. A 3/1 ARM has an initial rate that lasts three years, a 7/1 ARM's introductory rate lasts seven years, and so on.

Hybrid ARMs were a niche product for a while and became popular two years ago. With interest rates rising across the board, people who have hybrid ARMs know that their payments are going to jump.

"If you have an ARM it may very well be coming to, or has just hit, the adjustment date," says Frank Nothaft, chief economist for Freddie Mac. "And in that environment, it makes a lot of sense to refinance into a new loan."

Some are refinancing long before their initial rates adjust. Bitton says she has a client who got a 7/1 ARM a few months ago, and now he wants to refinance into a 30-year fixed. He doesn't have to worry about any upward rate adjustments until 2012, but he realizes now that he's going to stay put for a long time. He might as well take advantage of the 30-year fixed while it's still below 6.5 percent.

Rates on equity lines of credit have followed a more dramatic course than ARM rates. If you got a home equity line of credit in June 2004, its rate was about 1.21 percent lower than the average rate on a new 30-year fixed at the time. But equity credit lines are tied to the prime rate, which goes up every time the Federal Reserve boosts short-term interest rates. Since June 2004, the Fed has raised short-term rates by 3 percentage points. But the 30-year fixed is only a few basis points higher than it was back then.

As a result, the average rate on a credit line is now 60 basis points higher than the rate on a new 30-year fixed. That's unusual, Bitton says, and borrowers are noticing. Some are refinancing their primary mortgages for more than the amount owed, a maneuver known as a cash-out refi, and paying off their credit lines with the cashed-out amount.