The Pros and Cons of Today's Mortgage Rates

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Published: 31st October 2012
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So far, 2012's mortgage rates have been unpredictable. Oh sure, we knew they were going to be low -- and stay low until there is massive improvement in the housing industry. However, trying to keep track of mortgage rates on a weekly basis is almost like riding a rollercoaster!

For example, August brought us an upswing in mortgage rates. The average 30-year fixed rate climbed all the way to 3.91%, and the average 15-year fixed rate hit 3.12%. But as of mid-September, those average rates had dropped -- to 3.55% for a 30-year fixed mortgage, and to 2.85% for a 15-year fixed mortgage.

How does that stack up on a historic level?

For 13 weeks over the summer, we saw mortgage rates at record-low levels. The lowest-ever rates were set back in July -- when the average 30-year fixed rate was 3.49%, and the average 15-year fixed rate was 2.80%.

OK, so the numbers are low. But how do they affect you?

The truth is, there are pros and cons to today's mortgage rates:

PRO -- Low rates are good for refinancers

If you're refinancing an existing mortgage, lower rates mean lower monthly payments. So, as you might expect, the number of refinancing applications went up in the first part of September. From a bigger perspective, all of those refinancers are good for the overall economy. After all, if people are spending less on their mortgage payments, they have more money to spend on other things!

CON -- Low rates are a sign of an unhealthy economy

One of the biggest indicators of a healthy economy is a bunch of people buying houses. Since there aren't as many buyers right now as there should be, the Federal Reserve has to do something to encourage them to buy. So, the low mortgage rates you're seeing are really an incentive that's designed to jumpstart the economy.

Unfortunately, even record-low rates aren't creating the buying experts had hoped for. In fact, as of mid-September, the number of loan applications for home purchases (excluding refinancers) was down nearly 4%.

PRO -- Low rates are generating some activity

Even though it's not as much as experts want, today's mortgage rates have convinced some people to buy. Sales of new and existing homes are higher this year than they were in 2011. That's even better news, considering that the number of homes on the market keeps going down.

CON -- Low rates aren't as low as you might think

If you look at the average rate all by itself, you're overlooking a major mortgage expense -- the fees (or "points" as they're called in the mortgage industry). One point equals 1% of your total loan amount.

Usually, if you want to get the lowest rate available, you have to pay some points. As of mid-September, the average borrower was paying 0.6 points on both 30-year and 15-year mortgages.

CON -- Today's low rates could actually be lower

Because of increased regulations, the banks say they have to spend more to meet them. Making things more complicated, the banks are shooting for bigger profits than they have been in years past. So, if they want to meet their profit margins, they've got to charge higher mortgage rates.

Even though our current rates are sitting at near-record levels, experts say that if the banks weren't setting the bar for their profits so high that the rates would be much lower. In fact, they estimate the average 30-year fixed rate could be as low as 3.05%.

How much of a difference would that make?

If you had a 30-year fixed rate of 3.05% instead of 3.55% on a $300,000 mortgage, you would save $30,000 in interest over the life of your loan.


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