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Downgraded but not out?

By Greg McBride, CFA · Bankrate.com
Saturday, November 19, 2011
Posted: 9 am ET

When Standard and Poor's downgraded the United States' credit rating on Aug. 5, many analysts expected Uncle Sam's borrowing costs to rise sharply. That hasn't happened in the short term, though it's still a possibility in the longer term.

The yield on the 10-year Treasury recently fell below 2 percent (as a point of reference, it was around 3.25 percent on July 1). Ironically, the U.S. credit downgrade has actually pushed up interest rates for a lot of other borrowers.

All of the nervousness in Europe has led to a flight to quality. So while investors have been gravitating towards U.S. treasuries and pushing those yields lower, Italy's 10-year bond recently went higher than 7 percent, and Spain's has been around 6.5 percent.

Now is a great time for Americans to lock in fixed-rate loans. The benchmark conforming 30-year fixed-rate mortgage averaged 4.24 percent in our most recent weekly survey, the larger jumbo 30-year fixed came in at 4.77 percent and the 15-year fixed at 3.47 percent. All of those figures are hovering near record lows.

On the adjustable side, Libor has continued to inch higher over the past several months. At this point, most mortgages tied to Libor have only gone up by about a quarter of a percentage point. But it's not that quarter of a percentage point to worry about, it's the fact that it could be the tip of the iceberg, and those rates could go a lot higher in the years to come or if Europe were to come completely unraveled. With fixed rates so low, it makes a lot of sense to lock in.

One potential caveat is if you're planning to move within the next few years. Some of the hybrid mortgage products (which start with a fixed rate for three, five or seven years and then adjust later on) are currently offering rates around 2.5 percent. That's a pretty compelling value proposition for people who aren't planning to stick around forever.

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