Mortgage rates for 30-year fixed U.S. home loans fell for the second consecutive week, pushing borrowing costs to near record lows. The average U.S. 30-year rate dropped to 4.87 percent from 4.94 percent last week. The 15-year rate was 4.33 percent. Falling rates helped boost home-loan applications last week to the highest level since May. The Mortgage Bankers Association’s index of applications to purchase a home or refinance rose 16 percent. Rates around 5 percent, slumping home prices and a government tax credit for first-time homebuyers are bolstering demand for housing.
The Federal Reserve set out last year to encourage lower mortgage rates by pledging to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion in March. The purchases from Fannie Mae, Freddie Mac and Ginnie Mae brought down yields on mortgage-backed securities and allowed lenders to reduce rates on new loans while still selling the securities backed by them at a profit. The plan helped drive home loan rates to a record low of 4.78 percent twice in April. Mortgage applications to buy a home climbed 13 percent in the week ended Oct. 2 and the refinancing gauge surged 18 percent.
Recent data indicate the housing industry is emerging from its worst recession since the 1930s. The index of signed purchase agreements, or pending home sales, jumped 6.4 percent in August, a seventh consecutive gain, the National Association of Realtors said on Oct. 1. The 30-year rate is influenced by the benchmark 10-year note’s yield, which moves in the opposite direction of its price. Treasury prices have risen over the past week as $78 billion worth of auctions received above-average demand. “Another disappointing employment report had investors questioning the strength and sustainability of the economic rebound,” the Bankrate report said. “The resulting uncertainty drove investors into the safety of government and mortgage-backed bonds.” Not even a substantial auction of government debt has been enough to derail the streak of declining mortgage rates, the Bankrate report said. Rates are returning to levels not seen since the spring when, in an effort to cap mortgage rates, the Federal Reserve began a campaign to buy back $300 billion in Treasury’s. The Fed hoped that it would spark demand and keep yields — and therefore, mortgage rates — in check.
Mortgage rates fell as refinancing’s abounded. But those benefits seemed to wear off, as rates started on a tear in the summer. By June, the benchmark 10-year bond’s yield had increased steadily to hover around 4%. Now the central bank has less than $15 billion left to spend on its buyback program, which led some investors to worry that yields would soar again. So far, that’s not the case. On Wednesday, reports said Democratic congressional leaders were working to extend a $8,000 tax credit for first-time home buyers past the Nov. 30 expiration date and could even make it available to current homeowners who buy a new house. Homeowners have received a boost from both the tax credit and the lower rates — last year, the average 30-year fixed mortgage rate was 6.2%, according to Bankrate.
To translate the difference in mortgage rate into dollars, consider a $200,000 loan. At last year’s rate of 6.2%, the monthly payment would be $1,224.94, or $124 higher than the monthly payment at the current rate.