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Be prepared for mortgage rates to push past 7% over the next few weeks.

The average cost for a 30-year fixed-rate loan soared to 6.93% in Interest.com's latest survey, and Federal Reserve Bank raised the rate it charges banks to borrow money another quarter-point last week.

That will push the rates on virtually every type of consumer loans including mortgages higher over the next couple of months.

Although we haven't paid that much to borrow money for a home in more than four years, you should be OK with that.

Really.

Mortgages may cost more than they did last winter, last year or three summers ago when they reached record lows. But they are certainly not approaching the double-digit rates of the 80s and early 90s.

Buyers may have to settle for a little less house. Sellers may have to settle for slightly lower prices. And this won't be another record year for home sales like 2005.

That's what the experts on TV or radio mean when they say the housing market is 'cooling.'

But this should still be the third-best year for home sales, so let's be clear cooling is a long, long way from collapsing.

Interest rates are going up because consumer prices are rising faster than they have in a decade. Inflation like that is what prompts the Federal Reserve to boost interest rates for everything from mortgages and credit cards to auto and business loans, in an effort to slow spending and hold down prices.

After raising rates 16 times over the past 23 months anyone buying or selling a home -- or facing big increases in their adjustable rate mortgage or credit card payments, for that matter -- might have hoped the Fed would ease up.

But despite all those rate hikes inflation is running at an annual rate of 5.2% for the first five months of the year -- considerably higher than the 3.4% increase for all of 2005.

Higher energy prices are the main culprit. And it's not just the extra money we spend at the gas pump. The most recent inflation reports show higher energy prices are rippling through the entire economy, pushing up the price of many goods and services.

The Federal Reserve couldn't ignore that Thursday.

Now we'll have to see whether prices rise more slowly in June and July, and hope the Fed committee that makes these decisions doesn't raise rates again in August.

A 30-year fixed-rate loan the most popular way to finance a new house moved up to 6.93% this week after rising from just below 6.7% to just above 6.8% the week before.

This time last year we were paying 5.61% and in June 2003 rates had plunged all the way down to 5.28% -- the lowest since Interest.com (and its ink-on-paper predecessors) began its weekly survey of major lenders in 1985.

You'll pay more for other fixed-rate loans as well, according to Interest.com's national survey of lenders:

• 15-year loans climbed to 6.57% after holding in the 6.3% range for the past month, up from 5.23% one year ago.
• 30-year jumbo loans (for more than $417,000) rose to 7.11%, up from 5.89% this time last year.

Introductory rates for adjustable-rate mortgages, or ARMs, are rising even faster. Those 30-year loans offer a fixed rate for one to seven years. After that the rate is adjusted each year. If interest rates go up, you pay more. If they go down, you pay less. ARMs with an initial fixed rate for:

• One year, averaged 6.09% last week, and 4.68% one year ago.
• Five years, averaged 6.59%, up from 5.16% one year ago.

Here's what that means when you reach for your checkbook if you took out a 30-year, fixed-rate loan for $150,000 at:

• At today's rate of 6.93%, your monthly payment of principal and interest only would be $991.
• At last June's rate of 5.61%, your payment would have been $862, or $129 a month less.

At June 2003's rate of 5.28%, your payment would have been $831 or $160 a month less.

Investors and economists were excited by the Federal Reserve's statement because, for the first time since it began raising rates in June 2004, it did not say another rate increase was under consideration.

But we'll have a better idea of whether the Federal Reserve will keep pushing interest rates higher into the fall after the Labor Department tells up how quickly prices rose in June.

We can only hope that report, due July 19, will show prices climbing more slowly than in April and May, when the Consumer Price Index rose 0.6% and 0.4%.

What's known as the core CPI, which excludes particularly volatile prices for things like gasoline and food, rose 0.3% both months. Core inflation is now rising at an annual rate of 3.8 percent, the fastest in 11 years.

Given all of this, here's our best snapshot of what's going on in the housing market right now:

Over the past few years sellers could demand higher and higher prices for their homes, and buyers could afford to pay them, because the cost of borrowing money was at or near record lows.

Now borrowing is more expensive. Buyers can't afford to pay as much as they did last year, or just a few months ago. As a result prices are leveling off or falling in most, although not all, cities.

But if buyers and sellers realize what's going on and temper their expectations life can go on very nicely.

By Mike Sante

Interest.com Managing Editor

Have a question about your finances? Contact us at editors@interest.com

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