If you've been sitting on the fence for the past year hoping home prices would flatten, the run up in mortgage rates has just bitten you where you've been sitting.

A year ago, fixed mortgage rates hovered around 7 percent. Now they are nearer an 8.5 percent two-year high, according to Freddie Mac. A $200,000 mortgage will now cost you approximately $200 a month more in principle and interest than it did just a year ago.

Get off the fence, or expect more pain -- at shorter intervals.

Until recently, rates had been rising almost imperceptibly, actually dropping occasionally since late 1998 when they hit a 30-year low of about 6.5 percent. The snail's pace may have caught some consumers unaware of the decidedly upward trend.

Earlier this week, the Federal Reserve sent a wake up call when it raised short-term interest rates by a half percentage point. Not since 1995 has the fed raised rates more than a quarter point.

With the rate for overnight loans between banks at 6.5 percent, the highest level since January 1991, the Fed also raised the discount rate -- the rate at which the Fed's 12 district banks lend directly to financial institutions -- to 6 percent, the highest level since August 1991.

That means higher consumer loan rates -- including mortgages -- soon.

The increases marked the sixth time in the past 11 months that the Fed has raised rates to chill inflation. Most analysts had anticipated the half-point hike and mortgage lenders raised rates ahead of the Fed's move, but don't expect lenders to stop at 8.5 percent.

National Association of Home Builders chief economist David Seiders, among others, expects the prime rate to hit double digits before year's end.

Indeed, the Fed has hinted at more belt tightening if the nation's record economic expansion continues unabated.

"The true results of any hike may not become apparent for a week or so, as investors try to develop an appropriate strategy, specifically targeted on what will happen when the Fed next meets on June 27 or 28," said Warren Myer, CEO of San Jose, CA-based Myers Internet Services, Inc., a mortgage Web site consultant.

ARMS, Locks

Consumers best defense in a rising rate market includes adjustable rate mortgages (ARMS) and rate locks to temporarily freeze rates in time.

Freddie Mac reported 1-year ARMs still below the 7 percent threshold last week. That would give you a year's worth of mortgage payments at last year's fixed rate.

Whether you choose an ARM or a fixed rate, lock it up.

A traditional rate lock is a lender's guarantee that you'll get a certain interest rate, number of points, and other cost-related features.

The lock is good for a specific period -- if you fail to complete your home purchase or refinance before the clock runs out, and interest rates rise, be prepared to pay the higher rate or buy a new lock.

Here are some rate lock pointers.

Published: May 19, 2000

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.