Smart SpendingSmart Spending

When and why mortgage rates will likely hit 6%

Interest rates are up well ahead of any action by the Fed. Many experts think the lowest rates in the foreseeable future are the ones we're griping about now.

By MSN Money Partner Jun 26, 2013 3:18PM
This post comes from Richard Barrington at

MoneyRates logoCurrent mortgage rates are more than half a percent higher than they were at the beginning of May, and threatening to move higher. Could this be the beginning of the end for ultralow mortgage rates?

Couple talking to bank manager © Image Source, Getty ImagesTo calculate where rates could be headed, the analysis below digs into some historical figures -- and reaches a projection that could startle prospective home buyers and refinance candidates.

How high will mortgage rates go?
Rather than looking at possible extreme outcomes, this model uses one very conservative assumption: that inflation will remain as moderate as it has been over the past five years.

Mortgage lenders choose interest rates that they hope will earn them a premium over inflation. That premium has to cover their expenses and default risk, and if all goes well, earn them a profit. Over the past 40 years, rates on 30-year mortgages have averaged 8.68 percent. With inflation averaging 4.27% a year over the same period, this means mortgage lenders have charged an average premium over inflation of 4.41%.

Fortunately, inflation has been much more tame in recent years than over most of the past 40 years. Over the past five years, inflation has averaged just 1.6% annually. Assuming inflation remains under control, applying the long-term average premium for a 30-year mortgage rate to the current inflation rate would yield a "normal" mortgage rate of 6.01%.

Why are current mortgage rates so far below that? Much of it has to do with the Federal Reserve's efforts to reduce interest rates. If that's been a key factor in keeping mortgage rates below normal levels, then the end of that intervention might trigger a return to a more normal premium over inflation.

When will it happen?
The Fed has said that it will likely start adjusting its current interventions when the unemployment rate gets down to 6.5%. So how quickly might unemployment get from its current 7.6% level to 6.5%?

At the current rate of growth for the labor force and job market, it would take an additional 14.2 months before the unemployment rate gets down to 6.5%. Right now, that's the most likely estimate for how long the current Fed policies will continue. Even if job growth starts to accelerate, it will still probably be months before unemployment gets down to 6.5%.
So why are mortgage rates moving higher already? It's because markets tend to anticipate events. In this case, mortgage lenders don't want to get stuck with substandard mortgage rates for 30 years, so they have already started to protect themselves by raising rates.

In other words, mortgage rates are getting a jump on a possible change in monetary policy by starting to anticipate the impact of that change. If you've been considering buying a house or refinancing, you might take a cue from the market and anticipate that rates could move much higher over the next year.

More from

Jun 27, 2013 11:30AM
Truly, if anyone is contemplating purchasing a home, or upgrading to a larger/nicer residence, this is the time to go for it.  Rates may never again be this low, and prices are still recovering from the "bubble".  If there are any fence sitters out there, best be moving to lock in your rate be it refi or purchase and "get 'er done".   Waiting will only cost you more down the road and perhaps result in settling for less house than you could have had.  (and no, I am not a realtor nor a lender).
Jun 27, 2013 1:19PM
If rates rise much more in the short term, it will hurt prices.
Sep 24, 2013 3:08AM
It is too soon to anticipate rate increases to level or increase your market shares at this point. With the housing bubble shadow still hanging over us and just barely seeing the light from the so called great recession  who are these mortgage lenders anticipating too? The new 20 something coming of age group who are poised and positioned to make large home purchases at higher interest rates who have somehow been sheltered from the economy and world for the last 5 years and are ready to come in like gang busters and buy, buy, buy???
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.