30-year Fixed Mortgage Rates Above 5% in 2011?

Could 30-year fixed mortgage rates exceed 5 percent by the end of 2011? The Mortgage Bankers Association (MBA) seems to think so. On Wednesday, the banking organization said they expect interest rates on the benchmark  30-year loan to reach 5.3 percent later this year.

I’ll go a step further with my prediction. I think the benchmark rate could exceed 5 percent by the third quarter of 2011, or sooner. Of course, predictions follow market conditions — and never the reverse.

In 2010, we were spoiled with an average rate of 4.7 percent in this loan category.

This week, the average rate for a 30-year fixed mortgage rose again to 4.8 percent, according to the latest data from Freddie Mac. For the week ending January 28, average mortgages rates were as follows:

  • 30-year fixed-rate mortgage: 4.80%
  • 15-year fixed-rate mortgage: 4.09%
  • 5/1 ARM loan: 3.70%
  • 1-year ARM loan: 3.26%

Rising rates are one of the factors that will put a lid on refinancing activity in 2011. A shortage of qualified homeowners is another factor. Most people who were able to refinance have already done so, back when the rates were at record lows. As a result of these factors, the MBA expects mortgage refinance loans to drop by 66 percent in 2011. Purchase loans, on the other hand, are expected to rise this year.

Some Perspective on 30-Year Mortgage Rates

Many industry analysts expect home-buying activity to increase this year. Mortgage rates are attractive but predicted to rise. Home prices are starting to flatten in many areas. These are prime conditions for home buyers — those who can qualify for a loan, at least.

The question many of these buyers want to know is: Should I buy now, or later in 2011? Is it a big deal if rates do rise above 5 percent this year? Answer: It matters, but not that much. Here is some perspective for you…

Let’s look at my monthly payments and the total amount of interest paid in two different scenarios. In the first scenario, I got a 30-year mortgage rate of 4.8 percent (the average rate when this story was published). In the second scenario, I secured a rate of 5.3 percent, which is the MBA’s predicted average for later in 2011. In both scenarios, I’m taking out a 30-year fixed-rate mortgage for $250,000.

  • For a $250,000 mortgage loan with an interest rate of 4.8 percent, my monthly payment would be around $1,311. The total amount of interest paid over the 30-year term would be around $222,190. For simplicity, property taxes and home insurance have been excluded from this calculation.
  • For a $250,000 mortgage loan with an interest rate of 5.3 percent, my monthly payment would be around $1,388. The total interest paid over the 30-year term would be around $249,774. Again, property taxes and home insurance are not included.

The difference in the monthly mortgage payment from the first to second scenario is only $77. Nothing to set your hair on fire. The total amount of interest paid over the 30-year term is obviously more significant. Here the difference is $27, 584. But remember, this is spread out over a 30-year period. It also assumes that you actually hold the original loan for the full term. Most people refinance or sell long before that point. A little perspective goes a long way.

Disclaimer: This story contains forward-looking statements about 30-year fixed mortgage rates in 2011. These statements are based on predictions and should not be taken as fact. We do not make any claims or guarantees as to what interest rates will do in 2011.