Amid the doom and gloom on Wall Street following the federal bailout of mortgage giants Fannie Mae and Freddie Mac, there’s a glimmer of economic hope for the little guy.
Home mortgage interest rates have dropped below 6 percent for 30-year, fixed-rate loans. And they could be heading even lower.
That’s the best deal since at least mid-April for consumers looking to borrow money for a new home or perhaps to refinance their way out from an upcoming variable rate increase or balloon payment they’ve been worrying about.
Mortgage rates were already falling when the U.S. Treasury on Sunday threw Freddie and Fannie, which own or guarantee roughly half of the nation’s home mortgages, into conservatorship. But the decline in rates accelerated this week.
The drop wasn’t huge, but was enough “for anyone who’s looking to start kicking the tires on a new mortgage,” said Bob Gahagan, senior vice president and portfolio manager for American Century Investments.
For anyone who does refinance, it may generate enough savings to pay other debts or to salt away more to better ride out a soft economy, Gahagan said.
There is a catch, of course.
Lenders are likely to be more hard-nosed than last year about gauging one’s ability to repay a new loan. Credit market watchers say you’ll probably need a credit score of at least 700 to 720 or higher — which at least half of America has, industry statistics show — and a paper trail of steady income to get the best deals.
But even if your score is shakier and you have to pay more, you still may be able to find a loan cheaper than what it cost a month ago.
“Anytime you can get a mortgage below 6 percent with a 30-year fixed rate, I would certainly take it,” said James Nutter Jr., president of mortgage banker James B. Nutter & Co. in Kansas City.
Nimble borrowers agree.
Just last week, before the Treasury acted and while rates were still lying just north of 6 percent, the Mortgage Bankers Association reported a 9.5 percent nationwide jump in loan applications. It was fueled by a 15.4 percent increase in refinancing requests that appeared to come primarily from homeowners fleeing variable rates.
The break in mortgage rates comes at a fortuitous time for borrowers. A massive wave of adjustable mortgage rate resets is scheduled to crest in coming weeks, which is expected to fuel a rush to refinance into fixed-rate loans.
So, two questions. Will mortgage rates continue going down? And will the trend spread to credit cards and other consumer loans?
It’s hard to tell, Gahagan said.
For all the drama that accompanied the latest mortgage rate drops, the decline was not actually that large, only about half a percentage point, he said.
“That’s good news, and I don’t want to pour cold water on it,” Gahagan said.
The spread between interest rates in the U.S. Treasury securities markets and rates on mortgages isn’t falling as fast as it might because of uncertainties surrounding Wall Street investment firms and large commercial banks. And, in the lending system, estimates of the amount of mortgages that might be written down if credit problems persist stand at about $500 billion.
Both those trends reflect uncertainty, “and markets don’t like uncertainty,” Gahagan said.
If or when credit card and other consumer loan rates also start dropping will depend, in part, on what the Federal Reserve does at its next monetary policy meeting beginning Tuesday.
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