Mortgage rates fall for 5th week
By Holden Lewis • Bankrate.com

The gap between fixed-rate and adjustable-rate mortgages has narrowed in recent months, handing homeowners an opportunity to refinance.

The benchmark 30-year fixed-rate mortgage fell 3 basis points to 6.48 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 0.32 discount and origination points. One year ago, the mortgage index was 5.86 percent; four weeks ago, it was 6.77 percent. The last time the benchmark 30-year rate was lower was in Bankrate's March 29 survey, when it was 6.44 percent.

The benchmark 15-year, fixed-rate mortgage fell 4 basis points to 6.19 percent. The benchmark 5/1 adjustable-rate mortgage fell 4 basis points to 6.24 percent.

It looks like people are casting aside their ARMs and refinancing into fixed-rate mortgages. According to the Mortgage Bankers Association, a little over 40 percent of mortgage applications last week came from homeowners who wanted to refinance. Just about everyone is getting a fixed-rate mortgage: 26.4 percent of applicants asked for ARMs, the lowest ARM share since February 2004. A year and a half ago, more than 36 percent of applicants wanted ARMs.

Weekly national mortgage survey

Results of Bankrate.com's Aug. 23, 2006, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Refi rising
The rise in refinance applications and the fall in demand for ARMs are related. Many borrowers got 3/1 and 5/1 adjustables two or three years ago. These loans have a low introductory rate that lasts three or five years. Then the rate is reset annually, based on an index, such as an annual average of Treasury yields.

A lot of ARM holders have already gone through a rate reset or will within the next three years. Whenever the rates reset, they will go nowhere but up, because all interest rates have risen in the past two years. ARM rates have risen more, making fixed rates more attractive.

Consider the gap between the 30-year fixed and the 5/1 ARM, the most popular flavor of the adjustables. A year ago, the average 30-year was 5.86 percent, and the average 5/1 was 5.47 percent. The rate on the 30-year fixed was 39 basis points higher. Six months ago, the 30-year fixed averaged 6.34 percent and the 5/1 averaged 6.08 percent. The rate on the 30-year fixed was 26 basis points higher.

Gap narrowing
This week, the 30-year fixed is 24 basis points higher than the 5/1 ARM. The average borrower pays less than a quarter of a percentage point more to fix the rate for 30 years instead of five years. The 30-year fixed looks good by that comparison.

The narrowing gap between ARM rates and fixed rates "could help persuade homeowners with ARMs on the verge of resetting to make the decision to lock into a fixed-rate mortgage now rather than take a chance of a higher rate on the adjustment date," says Frank Nothaft, chief economist for Freddie Mac, the mortgage financing titan.

No one should get an adjustable-rate mortgage without understanding how the rate is determined, when and how often it resets, and how much it can rise or fall at once or during the loan's lifetime. If you need to brush up on your ARM knowledge, Bankrate's explanation of ARM indexes will be of use. Bankrate's Rate Watch feature keeps track of movements in various ARM indexes, such as the one-year MTA, LIBOR and COFI.