Best moves to make now: Mortgages

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Here’s how the Fed’s latest announcement will affect mortgage rates.

Fixed-rate mortgages:
Rates for long-term home loans have set modern-day lows for five weeks in a row. The Fed’s last rate cut, on Nov. 6 has a little bit to do with that. Much more important, though, has been what the Fed’s rate-setting committee has called “heightened geopolitical risks” — the confrontation with Iraq.

Investors are waiting for the situation with Iraq to be resolved. In the meantime, they put a lot of money in supersafe Treasury securities, which drives down yields. Mortgage rates don’t always move in the same direction as the short-term rates that the Fed sets. Instead, mortgage rates tend to follow the broad ups and downs of Treasury yields, and both have declined since the Federal Open Market Committee last met Jan. 28-29, when the Fed left rates alone.

In’s weekly index of mortgage rates offered by large lenders, the average 30-year rate was 5.70 percent March 12, the lowest mortgage rate since 1966. When the Fed cut short-term interest rates on Nov. 6, the weekly index of mortgage rates stood at 6.18 percent.

Best move now:
Mortgage rates have dropped from 6.11 percent to 5.70 percent during the last three months. Whether they remain that low depends upon what happens in Iraq and how investors respond — neither of which is predictable.

Long-term rates are extremely low right now. If you lock in a rate you feel comfortable with now, you might fret a little if rates drop even lower. On the other hand, you probably will feel satisfied in a couple of years, when rates are higher than they are now.

Adjustable-rate mortgages:
ARM rates tend to follow changes in short-term rates, such as the yields on short-term Treasury bills and notes, which track the federal funds rate closely. ARM rates are a bargain now. Eventually they will rise. But if the economy falls back into recession this year, they could fall.

Best move now:
Someone who plans to live in a house for five years or less might want to consider an ARM because rates are so low. One-year ARMs averaged 3.96 percent March 12 in the national weekly survey.
Search for the best ARM rates in your area.

Keep in mind that fixed rates are low by historical standards. Borrowers with a longer-term horizon should lock in a low rate for 15 or 30 years.