Mortgage rates drop to 6-month low
By Holden Lewis • Bankrate.com

Mortgage rates dipped this week, but not by much, in advance of next week's meeting of the Federal Reserve's rate-setting committee.

The benchmark 30-year fixed-rate mortgage fell 9 basis points to 5.76 percent, according to the Bankrate.com weekly 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 6.06 percent.

The 15-year fixed-rate mortgage fell 7 basis points to 5.16 percent. The one-year adjustable-rate mortgage rose 1 basis point to 4.21 percent.

Rates on long-term mortgages have been on a holding pattern for a month. In that time, the benchmark 30-year rate has bounced around in a rather narrow range, from a high of 5.89 percent to a low of 5.76 percent this week. It seems as if long-term rates paused after the Aug. 10 Fed meeting, and are on hold now in anticipation of the Sept. 21 meeting.

Back on Aug. 10, "the Fed raised the federal funds rate a quarter point and we saw the long-term rates retreat," says Dave Herpers, director of consumer affairs for online mortgage lender Amerisave. "Our thought is that after change from the Fed, more information came out regarding job growth and the economy, and things looked a little bit stalled. We're not seeing the job growth we would have expected, we're not seeing a resolution in the Middle East, in Iraq, and things kind of stalled."

Because August's net job creation of 144,000 was in line with forecasts, the release of that employment report didn't sway interest rates much. That and other economic reports paint a picture of an economy that is growing, but not rapidly. Meanwhile, the Federal Reserve makes it clear that it will continue to raise short-term interest rates, keeping future inflation in check. That holds down long-term interest rates.

With rates lower than they've been since the end of March, a refinancing boomlet is at hand. Herpers says that, generally speaking -- there are a lot of exceptions, of course -- homeowners are refinancing by getting fixed-rate mortgages at terms of 30, 20 or 15 years. Home purchasers are more likely to get adjustable-rate mortgages, or ARMs.

Why are ARMs more popular among buyers, and fixed-rate loans among refinancers? "If I had to guess, the folks who are purchasing homes, they're more concerned with payment and getting approved for a larger property than the refinance customer, who is more concerned with paying down a mortgage debt," Herpers says.

An ARM rate is lower than a fixed rate, so the monthly payment is lower for a given loan amount. Many people use ARMs so they can buy houses that they couldn't afford with higher-rate fixed-rate mortgages. Herpers says buyers choose ARMs because they offer the lowest initial rates.

On the other hand, a mortgage refinancer isn't focused on qualifying to buy a house, and instead is looking for a way to pay off debt more quickly. Even a small reduction in interest can make a refinance worthwhile, especially for a homeowner who wants to use the mortgage to pay off credit card debt.

The difference, or spread, between ARM rates and fixed rates is narrowing. That's what happens when the Fed raises short-term rates while long-term rates fall. On June 16, the average rate on a 1-year ARM was 4.37 percent and the average rate on a 30-year fixed was 6.35 percent. The fixed rate was 1.98 percentage points higher. This week, three months later, the difference is 1.55 percent.

The narrower spread means that fixed-rate mortgages seem like a better deal, in comparison to ARMs, than they were earlier this year. But comparing fixed rates and ARM rates is like comparing the prices of milk and beer. No matter the comparative prices, sometimes milk is more appropriate and sometimes beer is.

ARM or fixed? It comes down to how long you expect to live in the house and "your prospect of rising earnings in the future to withstand a higher payment when you adjust," Herpers says. With the Fed's track record over the last 10 years, no one expects interest rates to get out of hand, anyway.