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Interest rates dip toward record low

The low cost of money lets Americans ditch loads of mortgage debt.

By MSN Money Partner May 27, 2011 9:18AM

This post comes from Marilyn Lewis at MSN Money.


Here's to a little good news, thanks to falling interest rates.


It had seemed, for a time, that we'd seen the last of this era's low, low rates after they hit 4.23% in October. That was the lowest point since Freddie Mac started keeping records in 1971.


After that, rates rose again and peaked in February at 4.95%.


But … drum roll: Rates have been sliding ever since.


This week the average rate on a 30-year fixed-rate home loan dropped to 4.6%. The last time rates were this low was July last year, on the way to that October record.


Back then, you paid 0.8% of a point to get the record-low rate. Today's low rate costs an average of 0.7% point (a fee paid to buy down your interest rate: 1 point is 1% of the loan amount.)


Rates for 30-year loans topped 10% between 1978 and 1990 and peaked at an average 18.45% in October 1981. For that privilege, you'd pay 2.2 points, on average.


You get the idea: Rates today are a nice deal. Sadly, few Americans can take advantage of them. Most in a position to refinance -- with a job, stable finances, a good credit score and equity in the home -- have done it. Buyers are in scarce supply, lenders being super picky about giving out loans. Post continues after video.

Home prices

In the housing market, a return to normal is not yet in sight. The evidence: Home prices are still falling, nationally. A trusted government report (.pdf file) confirms this, adding that prices were 5.5% lower on April 1 than at the same time last year.


In fact, the FHFA report says prices fell faster than in the previous two years. You can see the details, by city, here, and by state, here.


At the same time, home-price reports came out this week from the Department of Housing and Urban Development and the Census Bureau, saying new-home prices rose a little in April. But these are new homes -- a small segment of the market. It's too soon to take any solace from this data. It could be a blip.


Other reports -- from CoreLogic, Zillow, Clear Capital and Fiserv -- "all point to continued downward pressure on housing prices," says the Mortgage Bankers Association's newsletter. The bankers blame the depressed housing market on the vast number of foreclosed properties on or waiting to come on the market. Also, they say, potential homebuyers are holding back.


The good news

Meanwhile, though, we seem to be making the most of opportunities forced on us or available to us by bringing debt under control:

  • The number of people defaulting or late paying credit card bills is dropping.
  • The number of homeowners delinquent on mortgage payments dropped 1.2% from January -- by 18.4% from February 2010.
  • And we're "pounding away" at our mortgage debt, having lowered it by nearly $400 billion between late 2007 and the end of last year, writes HousingWire.

Pause a sec, please, to take in this number: $400 billion.


It's roughly what taxpayers spent to rescue Freddie Mac and Fannie Mae in 2008. It's more than twice the cost of bailing out AIG. It's more than half the entire cost of the TARP (Troubled Asset Relief Program) bailout.


In other words: An astounding amount of household debt got erased in three years. How?


According to Freddie Mac's chief economist, Frank Nothaft, the recent wave of refinancing gets a lot of the credit. It's part of a larger trend of Americans shedding household and personal debt.


It wouldn't be possible without low interest rates, of course.


Of those who refinanced to pay off a 30-year, fixed-rate loan, 34% got a shorter-term loan -- for 15 or 20 years -- instead.


"Part of the attraction for such borrowers, of course, is that shorter-term loans have a lower interest rate," points out Nothaft. This week, borrowers got a 15-year fixed-rate mortgage, for example, for an average 3.78% (paying 0.7 point.)


Of those refinancing, 21% put cash in -- instead of taking it out -- to bring down their mortgage balance.


Not many years ago adjustable-rate mortgages were a hot product. And rates now are incredibly low:

  • A five-year hybrid ARM averaged 3.41% this week (with 0.5 point).
  • A one-year ARM averaged 3.11% (with 0.5 point).

But we've grown conservative. Or wary. Of all the newly refinanced loans, 95% now sport fixed rates.


Nothaft writes:

We found that the typical borrower reduced their interest rate about 1.2 percentage points by refinancing during the first quarter. For a 30-year fixed-rate mortgage with a $200,000 loan balance, that's a monthly payment savings of about $150.

More on MSN Money:

May 29, 2011 8:03AM
I think rates need to start rising.  If you want people to start buying houses, make it clear that these low rates aren't going to be around for long.  Right now, many of those that would like to buy continue to wait because they think prices and rates will continue downward.  A rate increase might motivate them to take action. 
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