Attention Home Buyers: Lock in Your Rate

Interest rates on mortgages have spiked in the past 10 days, and there's a serious risk that they're going get a lot higher. If you act quick, you can still find some good deals.
By: BRETT ARENDS: WSJ.com
If you are thinking about buying a home, it's time to look into locking in your rate.

Now.

Rates have suddenly spiked in the past 10 days and there is a serious danger that this could get a lot worse.

The average interest rate on a typical 30-year fixed loan has jumped to 6.02% from 5.82% in a week, according to data tracked by Bankrate.com. That's because rising inflation fears have caused a jump in the interest rates on long-term government bonds.

On a $300,000 mortgage, the increase will add $38 to your monthly payments. It will cost an extra $4,000 in interest over the total life of the loan.

You can still get some good deals. Bankrate shows some lenders still offering rates below 6%, though not many.

(These rates only apply to so-called "conforming" loans, which are $417,000 or less, in most parts of the country. These mortgages are effectively underwritten by Uncle Sam. Rates for "jumbo" loans, which are above these limits, are higher; more on jumbos below.)

No one knows where rates will go next. But if you find a reasonable deal now, it may be worth risking a deposit to lock it in for a month or two if you can.

Regular readers know I was warning about this through the winter. While others were panicking about a mythical "great depression," I was cautioning about the more likely danger – namely that as the central bankers flooded the entire system with extra cash, they would end up stoking more inflation. Higher inflation means higher interest rates and the end of cheap mortgages.

Whether we have already arrived at this unhappy state remains to be seen. But it's a danger.

How much more does a higher rate actually cost you?

As a rule of thumb, for each $100,000 you borrow, an additional tenth of a percentage point on your mortgage rate will add about $2,300 to the total amount of interest you will pay over the life of the loan.

Yes, that's before mortgage interest tax relief, and to be really technical you'd need to shrink this sum by a discount rate to put it in true, present value terms (I only mention these things because too often financial media leave them out). So the effective cost will be less. But it's still more than petty cash.

Now, about those jumbo loans. There's some good news for those buying a home in higher-cost regions, such as New York and California, and seeking to borrow a bit more than $417,000.

For those so-called "jumbo comforming" loans, says Bankrate chief economist Greg McBride, "rates have dropped dramatically in the past few months."

The reason? Uncle Sam, as part of the emergency bailout during the financial crisis, raised the size of the mortgages it would underwrite in these areas. Nationwide, loans up to $417,000 were already backed by Fannie Mae and Freddie Mac. Now lenders get some Federal protection for making bigger loans in areas where prices are higher. In some areas like New York City and San Francisco, where prices are simply absurd, these limits can go above $700,000.

(Initially, after the government first announced this measure, the lenders still remained reluctant. A few weeks ago they at last started acting. Rep. Barney Frank, chairman of the House banking committee, says this happened after he threatened to hold hearings on the matter. It may also be that the financial panic had begun to subside).