Mortgage rates skyrocket
By Holden Lewis • Bankrate.com

Mortgage rates skyrocketed this week as investors fretted about a pickup in inflation.

The benchmark 30-year fixed-rate mortgage rose 41 basis points, to 6.37 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 0.4 discount and origination points. One year ago, the mortgage index was 6.29 percent; four weeks ago, it was 5.57 percent. The 30-year fixed hasn't been this high since the middle of October, when it was near 6.5 percent.

The benchmark 15-year fixed-rate mortgage rose 41 basis points, to 5.87 percent. The benchmark 5/1 adjustable-rate mortgage rose 27 basis points, to 5.77 percent, and the 30-year fixed jumbo, for loans of more than $417,000, went up 39 basis points, to 7.55 percent.

Weekly national mortgage survey

Results of Bankrate.com's Feb. 20, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

The refinancing boomlet of a month ago is merely a wistful memory, like a shipboard romance. A little math explains why: The 30-year fixed has risen more than three-quarters of a percentage point in four weeks. According to the Mortgage Bankers Association, refinances have decreased about 31 percent in three weeks.

It was "really party time" when rates were close to 5.5 percent, says Michael Moskowitz, president of Equity Now, a mortgage lender based in New York City. Now business has slowed again. He's waiting for the higher limits on conforming loans to kick in, but no one knows when those will be available.

Inflation looming
The reason for the sharply rising rates is simple: "People are concerned about inflation," Moskowitz says. "People see the loosening of Fed rates. They think demand in China and India is still up. Oil is in the high 90s." With worldwide demand strong, and with commodity prices rising, inflation seems a threat.

And inflation is the enemy of low mortgage rates.

"Lenders, who are going to be investing money for a rate that's locked into a 30-year period, are going to be very concerned about inflation," says Barry Habib, publisher of the Mortgage Market Guide, an online resource used by mortgage bankers and brokers. Habib, like Moskowitz, traces the inflation fears back to the Federal Reserve's series of short-term rate cuts.

"When the Fed cuts rates, the economy typically is the beneficiary," Habib says. "If it's deemed that the economy is going to get some stimulus from it, the economy is going to perk up, businesses do better, more sales are made." Manufacturers, service providers and retailers are more free to raise prices in the face of climbing demand.

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Mortgage rates follow bond rates
"The bond market figures this out instantaneously," Habib says. Bond yields rise and mortgage rates follow.

Mortgage lenders find that their customers are suspicious about this dynamic. When people hear that the Fed has cut short-term rates, they expect long-term mortgage rates to move in the same, downward direction. But it's a stubborn fact that when Fed rate cuts are deemed inflationary, long-term mortgage rates go up. And that's what has been happening in the past few weeks.

As Habib says, it didn't take long for the bond market to figure out the inflation picture. On Wednesday, the Consumer Price Index indicated that overall prices rose 0.4 percent in January (up 0.3 percent excluding food and energy). That translates into an annual inflation rate of almost 5 percent. By that measure, a rate of 6.37 percent for a 30-year mortgage seems like a bargain.