Home loans cost a little more, but remain affordable

The mortgage industry is in turmoil.

Everyday brings new revelations about soaring foreclosure rates, billion-dollar losses and lenders shutting down, leaving borrowers in the lurch and thousands out of work.

Yet, through it all, interest rates remain surprisingly affordable.

After peaking in mid-July, the cost of most fixed-rate and adjustable-rate mortgages (ARMs) has fallen back towards the very reasonable loans we enjoyed last fall and winter.

With the average rate for a 30-year, fixed-rate loan below 6.75% the past two weeks, we're only paying about a quarter-point more than we did before the current crisis began.

The only exception has been jumbo loans the fixed-rate mortgages for more than $417,000. They've continued to get more expensive and now cost well over 7%.

If you're in the market for a mortgage, here's what you need to know about the current crisis:

Banks and finance companies obtain most of the money they loan for mortgages from two government-chartered companies commonly referred to as Freddie Mac and Fannie Mae or large private investors such as retirement plans, mutual funds and insurers.

Those investors have lost incredible sums of money over the past several months because so many homeowners are defaulting on loans made from 2004 through 2006 -- particularly on ARMs given to borrowers with poor credit.

Almost everyone blames this mess on lax lending standards and a screwed up system that rewarded mortgage brokers for pushing loans that borrowers had little or no chance of repaying.

As a result, you'll be expected to meet more stringent standards than borrowers faced if you'd applied just a few months ago. Even borrowers with good credit need a larger down payment, higher income, fewer debts and the ability to fully document all of that.

There's also less money to lend because private investors are refusing to provide it.

That's why jumbo loans -- about one out of every 10 mortgages -- have become particularly difficult and expensive to obtain.

The government-chartered companies, Freddie Mac and Fannie Mae, aren't allowed to buy mortgages that are over $417,000. All of the money for jumbo loans must come from a rapidly shrinking pool of private investors.

Given all of that, no one should be surprised if interest rates were through the roof.

But they aren't.

Our most recent survey of major lenders taken August 8 found the average:

30-year loan fell to 6.66% after peaking at 6.82% in mid-July.

15-year mortgage fell to 6.33% from a high of 6.5% three weeks ago.

30-year jumbo loan rose to 7.35%, the highest it's been since January 2002.

That means you'd have to pay $642 a month for every $100,000 borrowed with an average 30-year loan. While that's just $5 more than you'd have paid in August 2006, it's $30 a month more than in mid-March when interest rates were below 6.2%.

Our extensive database of the best mortgage rates from across the country shows a number of lenders offering borrowers with good credit loans of 6.25% with fees of $1,000 or less.

Mortgages are certainly not as cheap as four summers ago when 30-year rates bottomed out at 5.28% -- the lowest they've been since Interest.com (and its print predecessors) began its weekly survey of major lenders in 1985.

But taking a longer term view, home loans remain surprisingly affordable.

Today's rates are lower than 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.

Adjustable-rate mortgages also spiked in late May and are only slightly below their June peaks. Our survey found a 30-year ARM with an initial rate guaranteed for:

Five years costs 6.55%.

One year costs 6.15%.

The difference in rates for ARMs and fixed-rate loans what lenders call the spread is much smaller than usual.

Opting for a five-year ARM saves a mere $7 a month. That's not enough for most buyers to risk rates and payments going up when those loans begin resetting. That's why only one in five homes are being purchased with ARMs and the great majority of homeowners with ARMs are choosing fixed-rate loans when they refinance.

Where will all this lead?

Economists at Freddie Mac originally predicted 30-year fixed rate loans would average 6.2% this year and 6.4% in 2008.

Now they're saying rates will remain around 6.7% the rest of the year.

By Mike Sante

Interest.com Managing Editor

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

Inside Mortgages Weekly Column

Home loans cost a little more, but remain affordable