Low Mortgage Rates Are Back—For the Moment By Brett Arends Wall Street Journal 08-28-09

Low Mortgage Rates Are Back—For the Moment
By Brett Arends
The Wall Street Journal
August 28, 2009

If you missed out on refinancing your mortgage last spring, here's another opportunity.

A window has opened up in the mortgage market—thanks to some unusual movements in the bond market, rates have come down in recent weeks, and someone with good credit may be able to get a 30-year fixed rate for as little as 5% right now.

Yes, mortgages still aren't as cheap as they were in May, when rates fell as low as about 4.75 %, but they're still a pretty good deal. As recently as June, rates spiked around 5.6%. And before the financial crisis walloped us last year, they were over 6%.

Greg McBride, senior financial analyst at Bankrate.com, says mortgage rates have been falling for a few weeks.

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In a recent Bankrate survey the average rate was about 5.5%, he says, but you can do better if you look. "The different between getting 5.5% and 5% is shopping around," he says.

The obvious caveats apply. You'll need good credit to get the best rates—Bankrate cites a credit score of 700 or above. Those with lower scores may end up paying a higher rate or fees. And these rates only apply to conforming loans below non-jumbo limits.

The main reason for the cheaper home loans: A slump in the yields on long-term government bonds.

Long-term mortgage rates generally follow those on ten-year Treasury notes. And the yield on the ten-year Treasury has tumbled to around 3.47%, down from 3.85% in early August.

It's an open question how long mortgage rates and treasury yields will stay this low, or whether they'll dip lower still.

The latest move in the bond market is a bit of a mystery, and it looks vulnerable to any jump in growth expectations or fears of inflation.

Even if you aren't in the market for a new mortgage, the latest moves in interest rates may have you wondering about the economy. Usually lower yields suggest a more ominous turn ahead.

But there have been plenty of signs pointing to some degree of an economic rebound. Growth should mean higher short- and longer-term interest rates for both mortgages and treasurys.

The stock market has been suggesting there are better times ahead, even as bond yields have moved down.

Erik Weisman, investment officer at mutual fund company MFS in Boston, says some of the reasons behind the dip in treasury yields are technical, and concern the timing of bond purchases by banks and other institutions.

Comparison of the yields on regular and inflation-protected Treasurys shows that about half the move in bond prices is a result of fading fears about inflation.

It's unclear how long mortgage rates will stay low. If there are further signs that the economy is improving, or if the market worries about inflation return, expect bond yields,—and mortgage rates—head higher.