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30-Year Mortgage Drops Back to Record Low of 3.49%

Written By:
September 23, 2012 at 10:31 PM

Falling Mortgage Rates

The 30-year fixed-rate mortgage returned to the historic low established in mid-July of 3.49% compared to3.55% the prior week. The increasingly popular 15-year fixed- rate mortgage fell to a new low of 2.77%, a decline from 2.85% the previous week.

Bolstered by the Federal Reserve‘s decision to buy an additional $40 billion per month in mortgage-backed securities (MBSs), interest mortgage refinances and home purchases should remain low for the immediate term.

Lower Interest Rates Ahead

Keith Gumbinger, an executive with the mortgage information and analysis firm HSH, predicts mortgage rates will fall another 0.2 percent in the near future. However, he cautions of a “slowdown” in the volume of mortgage applications for home purchases and mortgage refinancing because of the processing backlog many lenders are experiencing due to inadequate staffing.

A person refinancing a $250,000 mortgage a year ago, into a 30-year fixed-rate loan, would have a principal and interest payment of $1,206.55. Refinancing the same mortgage at an interest rate of 3.49% reduces the monthly payment to $1,121.22, resulting in savings of $1,023.96 a year. The borrower would pay $30,718.00 less in interest payments over the life of the loan.

The U.S. Economy

The reasoning behind an additional round of quantitative easing concerns the Fed attempt to encourage more spending to stimulate the economy. Like the Fed, Gumbinger states that low interest rates will go beyond stimulating the housing and mortgage sectors, but also filter into the general economy. Borrowers who can save money on monthly mortgage payment would have more cash to spend on other items.

However, the economy is still trying to rebound from a recession that started in late 2007 and ended in the third quarter of 2009. In Q3 2009, the U.S. posted a revised annual growth rate of 2.2% --led by consumer spending, which accounts for 70 percent of the domestic economy.

In the last three quarters, the economy has grown at a rate of 1.7%, 1.5%, and 3%, respectively.

For the economy to perform at an acceptable level of growth and create jobs, it has to grow at a quarterly rate of 2-3 percent. This pace ensures businesses have the motivation to create jobs but not too fast, which can speed up inflation.

Some economists believe that a 2-3% growth rate no longer applies. In their opinion, the economy needs to grow at a faster pace, especially coming out of an economic downturn, considering the unemployment rate, and allowing for other dynamics.

Criticism of QE3

Critics of the Federal Reserve’s policy of keeping interest rate “artificially low” raise serious doubt about the initiation of a third round of quantitative easing when QE1 and QE2 have not worked as expected. They point to the abnormally high and persistent unemployment rate of 8 percent or higher.

Many analysts anticipate QE3 to push up the price of stocks and commodities. On the other hand, proponents of QE3 says, credits the Fed for not sitting by and doing nothing. Keeping mortgage interest rates low borrowers at a point when the housing market is finally showing signs of reaching a bottom, represents the best approach to helping the recovery.

According to Gumbinger, the main obstacle to homes sales, which climbed 7.8% according to the latest National Association of Realtors report, has nothing to do with interest rates, but credit standards. Many potential homebuyers have foreclosures or other negative information on their credit reports.

Furthermore, others remain on the fence after witnessing an average 34% drop in home values, which has millions of homeowners struggling with underwater mortgages.





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