Interest rates have been on a steady rise since the Federal Reserve began raising interest rates in quarter point increments beginning in the summer of 2004. While the Federal Reserve rate has risen from 1.00% to 4.75% (as of March 28, 2006) 30 year mortgage loan rates are still historically low (around 6.0%). Indeed, while 30 year loan rates have bounced between 5.0% and 6.0% in the past few years (in both 2003 and 2004 30 year loans have been both 5.0% and 6.0% in different months) long term mortgages are predicted to raise steadily from this point on. The big change in home loan interest rates has come in the form of short term ARM’s and home equity lines of credit (HELOCs). For example, 3/1 ARMs have risen from 3.2% in 2004 to 5.5% in 2006.

The Flattening Yield Curve - Interest rates usually vary with the term of loans. Short term loans costs less (has a lower interest rate) than long term loans. This is called the yield curve because of you plot the interest rate and term of a loan on a graph, it creates a line that curves upward. Right now, if you plot the relationship of interest rates and term of a loan on a graph the line will be close to flat. That means that short term loans and long term loans have about the same interest rate.

What the Flattening Yield Curve Means to You - A flattening yield curve can often mean that long term rates will increase in the near future. If you are looking to buy soon, this could be one of your last chances to get 30 year loans in the low 6.0% range. If you purchased or refinanced in the past few years with a variable rate loan or a HELOC, you have probably seen the interest rate and your payments increase dramatically. If you purchased or refinanced in the past few years with an adjustable rate mortgage (ARM) that has not adjusted yet, you are most likely looking at a large increase in rate and monthly payment when the rate adjusts. Short term loans will likely see continued rises in interest rates.

The Good News - If you have a variable rate mortgage you can likely refinance with a 30 year loan for only a slightly higher rate than what you are currently paying. By locking in with a 30 year loan now, you forgo the risks of an increasing variable rate. There are 30 year loan products that allow interest only payments for the first 10 years and may cost you no more per month now than payments on a variable rate mortgage.

For those with HELOCs, it is likely that you can get lower rates on a 30 year mortgage than you have currently have on your HELOC.

If you have a HELOC, variable rate mortgage, or an ARM that will adjust soon, talk to a mortgage professional about your options. If you would like information on mortgage specialists that our clients often use, please contact us.