Tax cut deal pushes mortgage rates up to where they were last spring

Keychain shaped like a house with 2 keys

Mortgage rates are going up after President Obama and Republican leaders agreed not only to extend but to expand tax cuts for all Americans.

What's the connection?

Their deal will add an additional $900 billion to the federal deficit over the next two years.

That's caused investors who thought Washington had been getting serious about reducing the federal deficit to demand better returns on all types of long-term debt, including mortgages.

The average cost of a 30-year, fixed-rate mortgage -- the most popular type of home loan -- jumped to 5.00% in our latest survey of major lenders taken Dec. 15.

By any historical standard, that's still quite cheap.

But this is the first time the average cost of those loans has been 5% or more since mid-May, and it's a half-point higher than in early November, when it reached a record low of 4.42%.

You can see what that means for mortgage rates in your area by searching our extensive database.

Until recently, it was easy to find lenders in most cities offering 30-year, fixed-rate loans for as little as 4.25% with no points and fees of $2,000 or less.

Now the best deals on those kinds of loans are running 4.625% to 4.75%.

That means principal and interest payments would increase from $492 a month for every $100,000 borrowed (based on a rate of 4.25%) to $522 a month (based on a rate of 4.75%).

Our mortgage calculator can show you the payment for any loan, any amount, rate and term.

The average cost of a 15-year mortgage -- a popular choice for refinancing a home -- has risen just as quickly, reaching an average of 4.37% in our Dec. 15 survey.

Interest rates plunged to record lows this fall after the slow economic recovery and the possibility of several European nations defaulting on their debt sent investors fleeing for the safety of Treasury bills or other debt guaranteed by the U.S. government.

That includes mortgages, because 96% of all new home loans are now backed in some way by an agency of the federal government.

When the Federal Reserve announced it would try to drive rates even lower by purchasing another $600 billion in long-term Treasury bills in early November, it appeared mortgages would remain incredibly cheap through the winter and probably most of next year.

But rates started inching up when the European Union and International Monetary Fund committed to borrowing large sums of money to prop up debt-ridden Greece and Ireland.

Then Obama and congressional Republicans agreed not only to extend all of the Bush tax cuts that were going to expire at the end of the year but to lower payroll and estate taxes and extend jobless benefits for the long-term unemployed.

Big institutional investors such as hedge and pension funds that will be expected to finance that borrowing were clearly surprised by the sudden willingness of the White House, and especially conservative lawmakers, to add so much to the federal deficit.

What happened to all of their tough talk about reining in government spending?

"The fiscal discipline in Washington is just not there, on both sides of the aisle," Bill Larkin, a fixed income portfolio manager at Cabot Money Management in Salem, Mass., told Fortune magazine. "It's our Achilles heel. We just can't take our long-term medicine till the market forces us to."

Higher rates on government bonds also will push up the cost of financing a home, because they are similar types of debt.

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