There's No Reason to Panic About Rising Mortgage Rates

Over the past few weeks, mortgage rates have spiked, sending potential homeowners shrieking through the streets in uncontrollable panic.

Okay, that last part might be a bit of an exaggeration, but you'd never know it by reading the mainstream media. Don't believe me? Google the term "mortgage rates spike" and you'll have more than enough material to last you through the summer.

The reality is that yes, mortgage rates have gone up. And yes, they've gone up a lot from where they were two months ago. But should you, as either a potential home buyer or home seller, be concerned? In a word: no.

All Good Things Must Come to an End

What's lost in the discussion about the recent rise in mortgage rates is what it says about the broader economy.

Two months ago, the interest rate on a 30-year fixed-rate mortgage was 3.35 percent. Not only was that cheap, it was historically cheap, like, once-in-a-lifetime cheap. Never before, and perhaps never again, will we see rates sink to such a ridiculously low level.

Why were they so low? Because the Federal Reserve, which has been putting downward pressure on mortgage rates since last September, had no confidence in the economy.

If anything, then, the fact that they are rising -- at the behest of the central bank, I might add -- can only mean one thing: The economy is getting better.

The Housing Recovery Won't Be Thwarted

The biggest concern is that rising rates will put a damper on the housing recovery and therefore be bad for people who are trying to sell their homes. The fact that this is transpiring during the prime selling season only adds to this fear.

But here's the thing: The impact on the housing market will likely be much less than one might think.

The vast majority of mortgages that have been underwritten over the past few years have been to people who are refinancing existing homes, not to people looking to buy new ones. As a result, when mortgage rates rose, the former dropped off considerably more than the latter.

According to the Mortgage Bankers Association, the volume of applications to refinance mortgages has dropped by 53 percent since the beginning of May. Meanwhile, the volume of applications for purchase-money mortgages has declined by only 8 percent.

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In other words, the impact on the demand for new and existing homes has, at least thus far, been comparatively muted.

To be fair, the same cannot necessarily be said for prospective homebuyers. If you fall into this category, it can't be denied that you missed an opportunity to get a mortgage at an interest rate that we may never see again.

At the same time, mortgage rates are still ridiculously cheap. The most recent national average puts the rate for a 30-year fixed-rate mortgage at 4.51 percent. As the Wall Street Journal noted, even at a 5 percent interest rate, housing is still affordable by historical standards.

Ask anyone who bought a house before 2010 what they think of that rate. "Jump all over it," they'll say. Prior to last year, that would have been the lowest rate in recorded history. And chances are, the same will be true going forward.

Yes, mortgage rates have spiked. But let's keep those increases in perspective.

John Maxfield is a contributing writer to The Motley Fool.