Mortgage rates hit modern-day record low
By Holden Lewis • Bankrate.com

Mortgage shoppers are benefiting from what could be called the gloom-and-doom dividend.

Mortgage rates are falling to modern-day record lows because investors have so much to worry about: war in Iraq, a capricious North Korea, political unrest in Venezuela and disappointing reports from American manufacturers and retailers.

The result is the lowest 30-year mortgage rate since Bankrate.com began tracking rates 17 years ago. The benchmark 30-year fixed-rate mortgage fell 6 basis points to 5.96 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 7.25 percent.

The previous record low in the Bankrate.com index was 6 percent, set the week of Nov. 13. Rates last dipped below 6 percent in March 1966, when the average FHA mortgage was at 5.7 percent, according to the Federal Reserve.

These are lousy days for corporations and their stockholders and an unsettling time for America's soldiers, sailors, airmen and marines. The fear and uncertainty benefit people who are buying houses or refinancing their mortgages.

"It's the same thing that's driving the Treasury markets," says Bob Walters, senior vice president of secondary marketing for Quicken Loans. "It's a combination of there is no inflation (in fact, worries about deflation), Iraq, Korea and Venezuela. People are putting their money into the safety of bonds."

Treasury bonds, that is -- one of the safest investments possible. As investors buy Treasury notes, prices rise in response to increasing demand. As bond prices rise, yields fall -- and mortgage rates are based on Treasury yields. On Wednesday, the yield on the 10-year Treasury dropped below 3.8 percent. That's extremely low by historical standards.

Walters notes that the 10-year Treasury yield dropped to around 3.65 percent in early October. "We're taking a run at it again," he says.

A year ago, the 10-year Treasury yield was about 5.15 percent.

Treasury yields and mortgage rates don't respond only to international tensions, of course. The overall economy plays a bigger role in Treasury yields and mortgage rates, and the economy refuses to take wing. Factory orders (excluding defense-related items) declined 2.3 percent in November. "The manufacturing sector gives every indication of being stuck in low gear, and the signals we get from orders provide little hope that we should expect much improvement soon," says Geoffrey Somes, senior economist for FleetBoston Financial.

When fixed rates are this low, the standard advice is to get a fixed-rate loan. That's good advice, for the most part, but Walters challenges borrowers to really think about how long they plan to live in their homes. Those who think they might move in a few years should seriously consider adjustable-rate mortgages, Walters says, because rates are around 4 percent. After factoring in inflation and the mortgage tax deduction, the real cost of borrowing at 4 percent drops to less than 1 percent.

The low rates haven't caused a stampede to mortgage offices because people are so busy with the holidays. Lenders are thankful for the breather. "We've been at this for more than a year -- this torrid pace of refinancing," says David Motley, loan production manager for Colonial Savings in Fort Worth, Texas. "Our people have done a great job, but they're just worn out."

Now is a good time to snap the whip and wear them out again.