Winter's record-low mortgage rates could increase thanks to Congress

Hand holding pen and signing mortgage

Mortgage rates remain at or near record lows, but it's unclear how long that might last.

That's because Congress late last year tied a payroll tax-break extension for millions of workers to what amounts to a new hidden tax on anyone who takes out a new home loan or refinances their old one.

The full impact has not yet been felt, but lenders are already taking notice.

So, if you've been hesitating to grab a new home loan, it's time to do something about it before rates begin to creep up. (That might already be happening in some places.)

Still, mortgages remain as cheap as they've ever been.

Today, you'll pay about three-quarters of a percentage point less for the average fixed-rate home loan than you would have at this time last year.

Our most recent rates survey will show you the average prices for home loans this week.

But you'll find even greater value with some of the advertised rates we’ve seen on 30-year, fixed-rate home loans. In most major metro areas, lenders are offering financing for 3.75% or less with no points and application fees of less than $2,000.

Search our extensive database of the best mortgage rates from hundreds of lenders to find rates for your target area.

Use our mortgage calculator to see what your payments would be for any fixed-rate loan.

New loan fee coming

In the coming weeks, record-low rates could take a hit as a higher government-mandated fee drives up borrowing costs up for consumers.

In December, Congress raised a fee on loans that can be sold to Fannie Mae and Freddie Mac -- the two government-controlled mortgage companies that buy most mortgages issued today -- to pay for a two-month payroll tax-cut extension.

Under the extension, employees will pay a 4.2% Social Security tax on their incomes instead of 6.2% through Feb. 29. The tax cut has been in effect since January 2011.

The increased charge, called a guarantee fee, is what Fannie and Freddie levy against lenders to guarantee the timely payment of principal and interest to the buyers of their mortgage-backed securities and bonds, says Dan Cutaia, president of capital markets and risk management for Fairway Independent Mortgage in Needham, Mass.

The charge is set to increase by at least a tenth of a percentage point under the legislation, which doesn't take effect until April 1.

But some lenders have already begun passing on this fee to borrowers in the form of higher rates.

The fee is showing up now, Cutaia says, because many loans financed today won't be transferred to Fannie and Freddie prior to April 1.

And this isn't the end of the hikes.

Bloomberg Businessweek reports further increases of more than four-tenths of a percentage point are expected over the next two years.

How will this higher fee affect you if you’re shopping for a loan?

The lenders we spoke with said interest rates would likely increase by 0.10% to 0.125% as a result of this first fee increase. These increases would cost borrowers an extra $6 to $7 a month for every $100,000 borrowed.

Those numbers might sound small, but they amount to an extra $72 to $84 a year for every $100,000 borrowed.

The only way borrowers can avoid the new fee is to go through a portfolio lender who doesn’t sell its loans to Fannie or Freddie, says Dean Vlamis, a broker at Perl Mortgage in Chicago.

However, portfolio lenders have tighter borrowing requirements that many applicants won’t be able to meet.

Also, even with the higher fee, Cutaia says that Fannie and Freddie are still the lowest-priced outlet for fixed-rate loans.

Since interest rates are still at historic lows, many borrowers won’t notice any rate increase.

They won’t see it in their loan paperwork, either.

Because almost all lenders will increase their interest rates, comparison shopping won’t reveal the price changes, either.

However, any time rates increase, some buyers will be priced out of the market. Higher interest rates reduce the amount buyers can borrow.

Of course, if market forces push interest rates down further, rates could remain at or near record lows even with the fee increase.

But the effect of the fee hike will still be there, like a hidden tax on consumers.

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