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Get ready for mortgage rates of 7 percent -- or higher.
The Federal Reserve on Thursday announced a quarter-percentage-point increase in its federal funds rate, the 17th boost in its benchmark short-term interest rate since mid-2004.
But while the stock market jumped in response, ripple effects from the decision mean most consumers will soon be paying even more on their credit cards and home equity loans, whose interest rates have more than doubled since 2003.
The Fed doesn't directly affect the mortgage market, but mortgage rates have been moving higher in anticipation of the Fed action and experts say more increases are likely.
Mortgage financing company Freddie Mac said in its weekly report Thursday that the national average rate for a 30-year fixed-rate mortgage rose to 6.78 percent, the highest level since May 2002. Bankrate.com said that as of Wednesday the rate for a jumbo 30-year fixed-rate mortgage was 7.11 percent, while a one-year adjustable-rate mortgage was 6.09 percent.
The monthly cost for someone taking out a $500,000 fixed-rate mortgage at 7.11 percent is $3,364, or $487 more than what a borrower with a similar loan would have paid in June 2003, when fixed rates hit their lowest point in decades.
Those choosing popular adjustable rate mortgages have seen an even bigger monthly hit.
A borrower who took out a $500,000 1-year adjustable rate mortgage at the low point for those loans in March 2004 would have an initial monthly payment of $2,223. A similar borrower at 6.09 percent would start out paying $804 more a month.
Bankrate.com mortgage market analyst Greg McBride said mortgage rates could continue to creep higher throughout the summer, boosted by bond market investors' fears about inflation.
"The Fed left the door wide open to another interest rate hike in August," he said, referring to the Federal Open Market Committee's next scheduled meeting. "They're saying the inflation dragon is not dead."
Investors sent stocks higher, apparently relieved that the Fed said it would weigh the threat of inflation against a possible slowdown in the economy before deciding whether to raise rates further. The Dow Jones industrial average gained 2 percent, and the Nasdaq composite index climbed 3 percent -- or 62.54 points, its biggest point gain in four years.
The steady march of Fed rate increases is designed to rein in consumer spending and other economic activity to control inflation. The government reported Thursday that the economy grew at its fastest pace in 2 1/2 years in the first quarter of 2006, but there are signs growth is slowing -- including in the housing sector.
And, said Keith Gumbinger, vice president of HSH Associates, 7 percent mortgage rates "just adds a little bit more bad news onto the scene, unfortunately."
Borrowers who have home equity lines of credit on top of their mortgages will feel the pinch of the Fed's action quickly.
While rates for 30-year mortgages tend to mimic the direction of the 10-year Treasury note, rates for most home equity lines of credit are tied to the prime rate, which moves up or down whenever the federal funds rate does.
After the Fed's move Thursday, most banks raised their prime rates to 8.25 percent, up from 4 percent in 2004. So most homeowners with equity lines are now paying at least 8.25 percent on that debt.
Rates on some of these lines are set one or two percentage points above the prime rate -- meaning some borrowers are paying 10 percent or more in interest. Depending on the amount of the home equity loan, those increases can really hurt.
Dawn Ruiz, who's currently trying to sell a house in Merced, said she has a home equity line on which she's been making interest-only payments, but she hasn't been watching the interest rate closely.
"I don't want to know," she said.
The monthly interest-only payment for a homeowner with a $150,000 home equity line at 8.25 percent would be $1,031.25, said Scott Goodrich of Monterey Bay Mortgage in Capitola. In 2004, when the prime rate was at 4 percent, payment on a similar loan would have been $500 a month.
Goodrich said some owners with home equity lines might benefit from refinancing into a new loan that consolidates their equity line and their first mortgage. For the most part, however, rising rates have squashed the refinance market, he said.
"The purchase market is still holding its own, but as rates go up, we'll be impacted certainly," he said. "We've been spoiled with such low rates over the past few years. . . . People's memories are short and young folks who have only experienced low rates, when they start seeing 7 percent, that might have an impact."
Doreen Woo Ho, president of Wells Fargo's consumer credit group, said with the news about recent Federal Reserve moves, consumers are "realizing it's more expensive to borrow money now."
Wells Fargo and some of its competitors now offer home equity lines with an initial fixed-rate period, making the repayment amounts more predictable. In the short term, Woo Ho said, home equity lines of credit will wane in popularity.
But it seems that even in more expensive times, Americans are eager to stretch their buying power.
"We certainly still have a healthy number of consumers who still see the need to borrow," she said.
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