Mortgage demand ebbs as home loan rates rise

06.10.09
By Sarah Beldo

After a window of opportunity in which home loan rates hovered near or at historic lows, they are finally rising - a trend which threatens to drive off potential buyers.

According to figures from the Mortgage Bankers Association, the average home loan rate rose from 5.25 percent to 5.57 percent during the week of June 5.

In comparison, just a couple of months ago homebuyers with good credit scores were being offered mortgages with interest rates below 5 percent.

The MBA figures suggest that this uptick in rates could have a dampening effect on the recovery of the housing market, as total mortgage applications fell by 7.2 percent to the lowest level seen since February.

Perhaps the most affected group of mortgage applications was those looking to refinance their current home loan. Refinancing applications dropped by 11.8 percent during the week as existing homeowners backed off their search for a better mortgage deal.

Experts worry that rising mortgage rates will couple with other financial problems facing American families - such as job loss and salary cuts - to slow down economic recovery.

"Clearly, 50 or 100 basis points more on mortgage rates is enough to matter. It effects what people can afford to buy," Bill Cheney, chief economist at John Hancock Financial Services in Boston, told Reuters.

As a remedy, the Housing Working Group of Business Roundtable - a group made up of high-powered CEOs - is urging the Federal Reserve to keep mortgage rates as low as possible for the coming year.

It also suggests expanding the homebuyer tax credit from $8,000 to $15,000 and opening it up to all homebuyers, rather than limiting it to those purchasing a residence for the first time.

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Recently homebuyers with good credit scores were offered mortgages rates below 5 percent