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As Housing Market Continues to Improve, Rising Rates to Hurt Refinances

The latest signs of housing market recovery: jumbo loans are on the rise and foreclosures increased for the first-time in five months.

Both stories help paint a picture of the market right now: as supply drops and demand rises, prices increase, and these price increases do a great deal for the health of the market.

Here is another example. CoreLogic reported that 850,000 mortgages came out from underwater during the first quarter of 2013. This means that 850,000 people no longer owe more than their home is worth.

With prices continuing to increase, some of these borrowers might sell their homes, which will help alleviate the supply crunch that has plagued the market as of late. As more of the 9.7 million mortgages with negative equity come out from underwater, expect to see more homes on the market.

All of this news is made possible by the double-digit gains in home prices and increased pace of sales – things are snowballing in the right direction.

One negative is the recent rise in mortgage rates. Higher rates haven’t yet majorly effected home purchasing activity. If anything, it has “scared borrowers into action,” as CNBC’s Diana Olick put it.

Higher rates, however, do effect refinancing activity, which hurts borrowers who have not yet had the opportunity to refinance into a historically low fixed-rate mortgage.

The first quarter Freddie Mac report on refinancing forecasts that refinance activity will slow.

The refinance boom that has occurred over the past three years has peaked and the market is slowing shifting toward more purchase activity. We estimate that refinances will make up approximately two-thirds of single- family originations this year and about one-half in 2014, compared to about 70 to 75 percent in 2012.

Still, mortgage rates remain on the low end of the historical spectrum, and as long as the Federal Reserve continues to buy bonds, rates will feel downward pressure. Borrowers may still be interested in moving down into a smaller term (from 30-year to 15-year) to save on interest payments, or taking cash out for a home improvement project.

Keep your attention focused on the Federal Reserve meeting this Wednesday. This will give us much more information about where rates will move in 2013.

Mortgage rates generally trended downwards on June 17. For the complete 10-program rate tracker, click HERE.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile