Mortgage Rates Rise, Defying Expectations

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With the economy slowing and the Federal Reserve Board cutting interest rates, mortgage rates were expected to come down a bit. That's not what's happened, though. Mortgage rates on 30-year fixed-rate loans have actually gone up over the last week.

STEVE INSKEEP, host:

You could also try a video game called "Save My Mortgage," although it would be rather depressing. The Federal Reserve's been cutting its key interest rate to try to boost the economy. And you would think that mortgage rates would also go down, but last week mortgage rates jumped, sharply.

NPR's Adam Davidson looks at why that's happening.

ADAM DAVIDSON: Everything worked like it should in January. Just as the economy started to slow, banks offered long term fixed mortgages at lower rates. This makes sense. With a slow economy fewer people can buy houses, so banks have to entice them with better mortgage terms. When the Fed cuts its rates banks can borrow money cheaper, so they lend to homeowners at lower rates.

But then, in mid-February, things stopped making sense. Mortgage rates went up, rising above 6 percent for a 30-year fixed. Why? The answer is one word: inflation. Banks fear that growing inflation could eat into mortgage profits, so they've demanded higher rates, which means fewer people will buy homes, which could, in turn, make the economy slow even more.

Adam Davidson, NPR News.

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