Cold comfort: Home loan rates remain below 6.5%

Affordable mortgages are making this winter a good time to buy or refinance a home.

Over the past six months rates have moved up a little, then down a little, but the average cost of a almost all types of mortgages, including 30-year fixed-rate loans, have remained below 6.5% since mid-August.

As a result, home loans cost about what they did last February and considerably less than last spring when rates were climbing towards a peak of nearly 7% in late June.

Our mortgage rate comparison charts can help you find the best rates and lowest fees in your area.

Freddie Mac -- the government-chartered company that buys, packages and then resells mortgages to investors anticipates the average 30-year fixed rate loan will continue to cost less than 6.5% throughout 2007.

The National Association of Realtors is only a little less optimistic, projecting rates will increase to 6.7% by the end of the year.

It would be great if mortgages were as cheap as they were four years ago when rates bottomed out at 5.28%, the lowest they've ever been since Interest.com and its print predecessors began our weekly survey or major lenders in 1985.

But today's rates still compare very favorably to the 7% or 8% we were paying during the mid- to late-'90s, and the double-digit rates we were charged throughout the '80s and early '90s.

Our latest survey of major lenders taken Feb. 22 found average cost for all three major types of fixed-rate loans are right at what we were paying this time last year:

30-year fixed-rate loan the most popular way to pay for a house -- costs 6.29%.

15-year fixed-rate loan costs 6.04%.

30-year jumbo loan (for more than $417,000) costs 6.47%.

Introductory rates for adjustable-rate mortgages, or ARMs, have also fallen since summer, but not as much. Those 30-year loans offering an initial fixed rate for:

One year averaged 6.03%, three-tenths of a point more than last February.

Five years averaged 6.15%, a little less than a tenth of a point more than this time last year.

That means you'd pay about $618 a month for every $100,000 you borrowed with the average, 30-year, fixed-rate loan. Those payments would be about $78 more than in June 2003, when rates for those loans hit a record low of 5.28%.

It's important to note that the difference between fixed-rate and adjustable rate loans has become very small, making ARMs a less attractive alternative.

The initial monthly payments for the average five-year ARM would be $609 for every $100,000 you borrowed -- or just $9 a month less than for a 30-year fixed rate loan. For many buyers that isn't enough to risk higher rates, and higher mortgage payments, five years from now.

It's also why many homeowners like Lawrence Jones of Monroe, N.C., are refinancing from an ARM to a fixed rate loan. His interest rate rose a percentage point in 2004, another point in 2005, and was poised to go up another point last fall.

"I wanted to stay under 7%," Jones told the Associated Press. "I'm a person who likes certainty, and I'm getting that with my new mortgage."

All home loans have cost less the past seven months because the Federal Reserve Bank ended a two-year campaign to fight a worrisome spike in inflation by pushing interest rates higher.

Here's how that's supposed to work:

The Fed acts as a kind of super bank, lending money to all the commercial banks we deal with everyday. So it begins charging those banks more to borrow money.

Those banks pass that cost along to us by raising rates on virtually every type of consumer loan from mortgages to credit cards. We respond by spending less, making it more difficult for everyone from furniture makers to hair stylists to raise prices.

Voila! Inflation is back under control.

Mortgage rates peaked at 6.93% in late June, just as the Federal Reserve pushed interest rates up for the 17th time in two years.

Home loans began to get less expensive in July when Fed Chairman Ben Bernanke told a Senate committee that all those rate hikes seemed to be working. We were spending less. The economy was slowing and inflation would surely follow.

Mortgage rates continued to decline after the Fed's rate-setting committee met in early August and, for the first time in more than two years, decided not to raise rates again.

The committee made similar decisions at its next four meetings following economic reports that indicate Bernanke is right and inflation is indeed slowing.

While the most recent inflation report showed the biggest monthly spike in health care costs in 16 years, the overall Consumer Price Index rose a modest 0.2% in January. And the CPI rose only 2.5% in 2006, well below the 3.4% increase in 2005.

As a result, we enjoyed affordable mortgage rates throughout the fall and early winter and most economists expect that will continue for the foreseeable future.

By Mike Sante

Interest.com Managing Editor

Have a question about your finances? Ask us at editors@interest.com

Inside Mortgages Weekly Column

Cold comfort: Home loan rates remain below 6.5%