Mortgages and car loans may soon cost more

Photo (c) John M Lund Photography Inc - Getty Images

A key interest rate has risen sharply this week

Throughout the pandemic, mortgage rates have been at record lows and falling auto loan rates have made new cars more affordable. Both are about to get more expensive.

The reason is the bond market. The yield on the U.S. government’s 10-year bond rose quickly this week and is now around 1.5 percent for the first time since the coronavirus (COVID-19) began to shut down the economy a year ago.

That might still sound low, but for nearly a year the interest rate on the 10-year bond has been well below 1 percent. Because home mortgages and many consumer loans, including the rates on new and used cars, are keyed to the 10-year bond, consumers have found that home and car payments have been more affordable.

That’s already begun to change. This week the average rate for a 30-year fixed-rate mortgage rose to 3.13 percent, jumping 19 basis points from the week before. In late January, the average rate was around 2.87 percent, according to Bankrate.

In January, a buyer taking out a $250,000 mortgage would have paid $35 a month less than today, or an extra $420 a year. That adds up to an extra $12,600 in interest payments over the life of the loan.

Some consumers have refinanced their auto loans

At the same time, auto loan rates, which have also been near record lows, are also moving higher. Rates have been so low over the last few months that many consumers who financed vehicles in 2019 or earlier have refinanced their car loans to save some money each month.

Though rates are rising, both home and car loans remain near historic lows, and the reason for their move higher is mostly positive. In short, bond yields are rising because of growing optimism about the economy.

New cases of the coronavirus have plunged in recent weeks. The pace of vaccinations has increased, with the total number of people in the U.S. who have been vaccinated hitting 50 million this week.

At the same time, Democrats in Congress are putting the final touches on a massive $1.9 trillion stimulus bill that would pump even more money into the economy. While that would put money in consumers’ pockets, it could also increase inflationary pressure. That, economists say, is another reason bond rates have been moving higher.

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