Rates climb past 6.5% for the first time since August

It was great while it lasted.

For nearly 10 months interest rates moved up a little, then down a little, but the average cost for most types of mortgages remained below 6.5%.

But rates unexpectedly rose in late May and early June, making home loans less affordable and more expensive than they've been since, well, this time last year.

Our most recent survey of major lenders taken June 6 found the average:

30-year fixed-rate loan -- the most popular way to pay for a house -- costs 6.61%.

15-year fixed-rate loan costs 6.33%.

30-year jumbo loan (for more than $417,000) costs 6.86%.

That's almost exactly what those loans cost a year ago and adjustable-rate mortgages are actually more expensive than they were this time last year. Our survey found a 30-year ARM with an initial rate guaranteed for:

Five years costs 6.52%, two-tenths of a point more than June 2006.

One year costs 6.17%, a quarter-point more.

That means you'd pay $639 a month for every $100,000 you borrowed with the average, 30-year, fixed-rate loan, or $30 a month more than the same loan cost in mid-March when rates were below 6.2%.

Opting for a five-year ARM would only save you $9 a month, and a one-year ARM a still modest $29 a month. We don't think that's enough to risk higher rates -- and higher mortgage payments when those loans start resetting.

While we're disappointed by this surprising spike, it's important to remember that rates are still lower than they've been over most of the past few decades.

Of course we'd like mortgages to be as cheap as they were four years ago when 30-year rates bottomed out at 5.28% -- the lowest they've been since Interest.com (and its print predecessors) began its weekly survey of major lenders in 1985.

But today's rates are still less than the 7% or 8% we were paying during the mid- to late-'90s, and the double-digit rates we were charged throughout the '80s and early '90s.

What happens next depends on whether investors decide to buy or sell 10-year Treasury bills, which the government sells as a way of borrowing money.

Mortgage rates tend to follow T-bill rates fairly closely, because both are considered to be safe, long-term investments. Over the past few weeks T-bill rates have risen significantly because pension funds, insurance companies, mutual funds and other major investors have been selling T-bills and taking their money to riskier, but better-paying investments.

It's unclear whether that trend will continue, and whether mortgages will continue to rise towards last summer's peak of nearly 7% for 30-year fixed-rate loans.

Of course, those are the average cost for each type of mortgage. Our extensive database of the best mortgage rates across the country shows borrowers with average, or better than average, credit can still qualify for rates of anywhere from 6% to 6.375% loans with modest fees of $1,000.

Higher rates will be particularly tough on borrowers with poor credit, who were already having a harder time finding loans they could afford.

Subprime loans, the high-interest mortgages taken out by borrowers with credit scores below 620, accounted for nearly one in five mortgages last year.

But lenders are making them harder to obtain after an alarming increase in the number of defaults and foreclosures. Applicants who would have had little trouble qualifying just a few months ago are being turned away because they don't make enough money, or have too much debt, to meet stringent new requirements.

Another big and very sudden change is that 100% financing has virtually disappeared for subprime borrowers. Last year about one out of every three subprime borrowers was given enough to cover the full purchase price of their homes. Now you'll need a down payment that covers at least 3%, if not 5% or more, of the price.

The Mortgage Bankers Association has projected that 30% fewer subprime loans will be made this year. And that was earlier this spring when Freddie Mac -- the government-chartered company that buys mortgages from lenders was confidently predicting 30-year fixed rate loans would average 6.2% this year and 6.4% in 2008.

By Mike Sante

Interest.com Managing Editor

Have a question about your finances? Ask us at editors@interest.com

Inside Mortgages Weekly Column

Rates climb past 6.5% for the first time since August