Rates of 6% -- or less -- make home financing easy

We'll continue to enjoy affordable mortgages this spring, making it a good time to buy or refinance a home.

Over the past seven 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, you can expect fixed-rate home loans to cost less than last spring when rates were climbing towards a peak of nearly 7% in late June.

Our mortgage rate comparison charts show many lenders offering rates well below 6% with modest fees of $1,000 or less.

Freddie Mac -- the government-chartered company that buys mortgages from lenders anticipates 30-year fixed rate loans will average between 6.35% and 6.4% throughout 2007.

That means home loans or at least fixed-rate home loans should cost less than last spring when rates were steadily climbing toward a peak of about 7% in June.

It would be great if mortgages were as cheap as four years ago when rates bottomed out at 5.28%, the lowest they've ever been since Interest.com (and its print predecessors) began its weekly survey of 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 March 14 found the average:

30-year fixed-rate loan the most popular way to pay for a house -- costs 6.16%, down from an average of 6.4% last March.

15-year fixed-rate loan costs 5.93%, about a tenth-of-a-point less than this time last year.

30-year jumbo loan (for more than $417,000) costs 6.41%, about two-tenths of-a-point less.

That means you'd pay about $610 a month for every $100,000 you borrowed with the average, 30-year, fixed-rate loan. Your payments would cost $15 a month less than for the same loan last March, and only $56 more than for the same loan in June 2003, when rates for those loans hit a record low of 5.28%.

Rates are not as favorable for adjustable rate mortgages. They cost about the same, or even a little more, than last March. Our survey found a 30-year ARM with an initial rate guaranteed for:

Five years costs 6.04%, almost exactly the same as a year ago.

One year costs 5.96%, nearly two tenths of a point higher.

That makes ARMs a relatively poor way to finance your home right now.

The initial monthly payments for the average five-year ARM would be $602 for every $100,000 you borrowed -- or just $8 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 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.

The Consumer Price Index rose a modest 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

Rates of 6% -- or less -- make home financing easy