Mortgage rates fall, await next Fed meetingThursday July 27, 6:00 am ET Holden Lewis
Mortgage rates are headed into hibernation until the next Federal Reserve rate-setting meeting. The benchmark 30-year fixed-rate mortgage fell 12 basis points to 6.77 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 0.28 discount and origination points. One year ago, the mortgage index was 5.84 percent; four weeks ago, it was 6.93 percent.

The benchmark 15-year fixed-rate mortgage fell 10 basis points to 6.39 percent. The benchmark 5/1 adjustable-rate mortgage fell 8 basis points to 6.47 percent. 50-50 on another rate hike?All of the declines occurred last week, immediately after Fed Chairman Ben Bernanke made comments to Congress that were deemed lenient on inflation. Bernanke said he didn't know if the Fed will raise short-term rates at its next scheduled meeting, on Aug. 8, and that the decision depends on economic data. The central bank has raised rates 17 times in a row. Before Bernanke's speech, investors were betting that there was a 90 percent chance that Aug. 8 would bring the 18th rate hike in a row. After his speech, another increase was given a 50-50 probability. Long-term rates and bond yields dropped the day of Bernanke's congressional testimony, and have stayed there in the week since. Weekly national mortgage survey Results of Bankrate.com's July 26, 2006, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan: 30-year fixed This week's rate: 6.77% Change from last week: -0.12% Monthly payment: $1,072.38 Change from last week: -$13.21
15-year fixed This week's rate: 6.39% Change from last week: -0.10% Monthly payment: $1,427.37 Change from last week: -$9.05 5-year ARM This week's rate: 6.47% Change from last week: -0.08% Monthly payment: $1,039.66 Change from last week: -$8.68 "Investors are trying to divine what the Fed will do Aug. 8," says Frank Nothaft, chief economist for Freddie Mac. The uncertainty left bond yields at a standstill this week. Mortgage rates have been steady, too, because they are heavily influenced by bond-like financial instruments called mortgage-backed securities. Fixed-rate fixationFixed-rate loans have become more popular at the expense of ARMs, and experts think that trend will continue. To understand why, look at the difference in rates between the benchmark 5/1 ARM and 30-year fixed. This week, the rate on a 5/1 ARM is barely a quarter of a percentage point lower, at 30 basis points. A year ago, the difference was about 40 basis points. A lot of economists expect the gap to narrow further. Nothaft predicts that in 2007, 19 percent of mortgages will be adjustables. Last week 28.6 of mortgage applications were for ARMs, according to the Mortgage Bankers Association.
Talk to a mortgage banker or economist about this, and you'll hear the phrase "flat yield curve." That phrase is another way of saying that there's not much difference between short-term and long-term bond yields. For example, this week the yield on a 10-year Treasury note was 5.07 percent, while the yield on a five-year Treasury was 5.02 percent. At a difference of 5 basis points, that's part of a flat yield curve. A year ago the difference was 18 basis points -- a steeper yield curve. The yield curve has flattened because the Fed has raised short-term rates eight times in the past year, while long-term rates haven't risen as much in response to low inflation expectations. Economists think the yield curve could flatten even more in the coming months. They make that prediction not because they expect the Fed to hike rates several more times (they forecast maybe one more), but because they think the inflation rate will drop.
ARMs still have appealBob Moulton, president of Americana Mortgage, a brokerage in New York, says ARMs will never go away, no matter how flat the yield curve. But they are losing their popularity. "It's my understanding that there's supposed to be a trillion dollars in ARMs that get reset next year," Moulton says. "I think maybe those people are tired of the ARMs, and a big portion will go toward fixed-rate mortgages." David Hall, executive vice president of Quicken Loans, says one factor could keep ARMs afloat: discount points. You get a bigger discount when you pay points on an ARM versus a fixed-rate loan, Hall says.
"A lot of folks who are going to be in their property for a long period of time probably do need to look at fixed rates," he says. But a lot of people know that they'll move within a few years, and it makes sense to look at ARMs. "As a mortgage banker, I always want to give clients that option," he says.