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Mortgage rates drop!

By Holden Lewis • Bankrate.com

Mortgage rates fell this week on continued signs of economic weakness.

The benchmark 30-year fixed-rate mortgage fell 17 basis points, to 6.02 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.44 discount and origination points. One year ago, the mortgage index was 6.42 percent; four weeks ago, it was 6.11 percent.

The benchmark 15-year fixed-rate mortgage fell 15 basis points, to 5.63 percent. The benchmark 5/1 adjustable-rate mortgage fell 15 basis points, to 5.71 percent. The benchmark jumbo 30-year fixed fell 12 basis points, to 7.29 percent.

The last time the 30-year rate was lower was in Bankrate's April 9 survey, when it slipped to 5.96 percent.

Weekly national mortgage survey This week's rate: 6.02%

5.63%

5.71%

Change from last week: -0.17

-0.15

-0.15

Monthly payment: $991.38

$1,359.60

$958.71

Change from last week: -$18.12

-$13.23

-$15.75

Bad news week
Much of the week's drop in mortgage rates happened Thursday and Friday, when a series of economic reports delivered discouraging news. Unemployment claims rose, industrial output fell, oil and natural gas prices kept rising, and consumer sentiment was depressive. The news wasn't all bad. Construction of apartments was up. But that wasn't enough to keep bond yields and mortgage rates from falling.

On Wednesday, the Federal Reserve released the minutes of its latest rate policy meeting, at the end of April. At that meeting, the Fed cut short-term rates by a quarter of a percentage point. The meeting's minutes implied that the April 30 reduction would be the last.

Last month's rate cut was a close call, the minutes said, adding that "several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening of the economic outlook."

In short, the Fed said that it won't cut rates again, even if the economy gets worse -- unless it takes a complete nose dive.

The bond markets took the news with equanimity, and yields didn't move much. A seasoned bystander might have expected an increase in rates based

upon the Fed's minutes, but bond traders seem to have guessed correctly that the minutes would hint at no further rate cuts.

FHA moves to risk-based pricing
When it comes to mortgages, one piece of important news got little fanfare. The Federal Housing Administration, which insures mortgages, announced that it will charge higher premiums to riskier borrowers and lower premiums to safer borrowers, starting in mid-July.

"It's actually really good for high-credit borrowers," says Dan Green, Cincinnati-based loan officer for Mobium Mortgage.

Right now, the FHA charges the same to everybody in its most popular program. Everyone pays an upfront fee of 1.5 percent, and on top of that, annual premiums of 0.5 percent of the initial loan amount, paid monthly. On a $100,000 mortgage, that means a $1,500 upfront payment (which can be added to the loan amount instead of being paid in a lump sum at closing), and monthly premiums of about $42.

Because the FHA charges the same premiums to everyone, it ignores borrowers' credit scores. Starting July 14, the premiums will vary, depending on credit score and loan-to-value ratio.

For example, someone with a not-good credit score of 575, borrowing more than 95 percent of the home's value, will pay an upfront premium of 2 percent and annual premiums of 0.55 percent. Both of those are increases over what everyone pays now.

People with higher credit scores will benefit, though, because their premiums will go down. Borrowers with credit scores of 680 or above will pay upfront premiums of 1.25 percent. The annual premiums will remain 0.5 percent, except for people borrowing more than 95 percent of the home's value; they'll pay 0.55 percent a year.

Inoculating himself from accusations that he's trying to soak the poor, FHA commissioner Brian Montgomery says that nearly one-quarter of FHA borrowers have credit scores of 680 or higher, and that these highest-scoring borrowers have lower median incomes than those with middling scores.

"What it means is that these hard-working families pay their bills on time, and I believe they deserve access to homeownership," Montgomery says.

The PMI reaction
FHA mortgage insurance isn't the only game in town. There's also private mortgage insurance, whose premiums have been based partly on credit scores for years. Green says it's "always a game-time decision" whether a client should choose a loan insured by the FHA or by private mortgage insurance, because interest rates vary.

For borrowers with high credit scores and substantial equity or down payments, the FHA is going to look more attractive, beginning in mid-July. As for borrowers with low credit scores, borrowing more than 90 percent or 95 percent of their homes' values: The FHA might be the only place where they can get mortgage insurance.



Category: Mortgage interest

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