Low Interest Levels & FHA Loans

by Peter G. Miller
June 2nd, 2010

Interest rates hit their low for the year last week, but how can this be?

The 30-year fixed-rate mortgage, says Freddie Mac, averaged 4.78 percent with an average 0.7 points for the week ending May 27, 2010.

“The 30-year FRM has not been lower since the week ending December 3, 2009, when it averaged 4.71 percent,” according to the company.

The National Association of Realtors reports that existing-home sales reached a seasonally adjusted annual rate of 5.77 million units in April, 22.8 percent higher than April 2009.

Do not more sales suggest more loan demand? And if there is more loan demand why aren’t rates higher?

“Despite $800 billion-plus of federal bailout and incentive dollars being thrown at the problem, inflation remains tame, surprising many economists,” says lender Henry Savage with PMC Mortgage. “Considering the tech bust ten year ago, followed by the DJIA losing ½ its value from 2007-2009, followed by the bursting housing bubble, in which many, if not most homes lost up to 25 percent of their value, it doesn’t surprise me that the economy remains sluggish.

“The flight to quality bringing down treasury yields and mortgage rates,” says Savage, “is evidence that despite how messed up the U.S. economy is, the rest of the world is in worse condition.”

“Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates,” says Michael Fratantoni with the Mortgage bankers Association.

“The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season,” he explained. “In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009. However, refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks.”

FHA Loans

Looking at the numbers and comments above it may be difficult to understand how home sales can be rising but purchase money loan applications are falling. One answer might be that applications reflect future sales while existing sale numbers describe past events.

In addition, given that FHA loan volume was down substantially in April, we may be looking at evidence that a larger number of private-sector mortgages are being originated.

The bottom line is that if you have a desire to finance or re-finance real estate then FHA loans remain a very good deal. You get today’s attractive rates with the assurance that comes with FHA-backed financing — mortgages with no prepayment penalties, no gotcha clauses, no hidden fees, and no strange or sudden monthly cost increases.

Is it possible that rates will go even lower? Possible? Yes. Assured? Hardly. While we don’t know what the future will bring we at least know that today’s rates are very good by the standards of the past 50 years, and that’s a good situation in the midst of a still-difficult financial environment.

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