Mortgage shoppers finding lowest rates since 1967

Thirty-year mortgage rates have rested below 7 percent for two solid months. Still, when the Federal Reserve cut a key interest rate on Tuesday, Dan Gilbert knew what would happen next.

Scores of callers would flood his firm, on-line mortgage lender Quicken Loans, with the same question: "The rates have dropped half a point; why haven't you dropped your rates?"

Because they're not tied directly to each other," answers Gilbert, chief executive officer of the Livonia, Mich., lender. Indeed, last week's half-point drop in the Federal funds rate is more directly tied to interest charged on shorter-term consumer loans, like home-equity lines of credit, than it is to long-term rates for mortgages.

A decline or not, mortgage shoppers could hardly have it any sweeter than it is now, says Gilbert.

That's because borrowers today enjoy "the lowest interest rates for mortgages since 1967. Not surprisingly, we've had our busiest two weeks of the year for mortgage applications."

And this while the nation still reels from the events of Sept. 11, plus warnings of a continuing economic downturn, points to how safe a haven Americans regard their homes.

Low interest rates have created opportunities for all homeowners to buy, sell or refinance a home," adds J. Lennox Scott, present of John L. Scott. "In many of our local markets we don't have enough inventory of homes in the more affordable prices ranges. We have buyers."

Robert Story, chairman of Seattle Mortgage and Seattle Savings Bank, seconds that. The bulk of his business is first-time buyers, many choosing condominiums.

"They're buying because they need a place to live," Story says. "People might think there's going to be lesser business, but I don't think that's true."

Steps to the decline

If the cuts in the Federal funds rate — six since June — haven't directly caused the interest rates to decline, what has?

A number of factors, including other government money rates, economic growth — or now the lack of it — and uncertainty in financial markets. That last one "has helped to hold down mortgage rates, and the housing sector of the economy is bustling with activity," said Robert Van Order, chief economist for mortgage-backer Freddie Mac, in a prepared statement.

Factoring in points, 30-year-fixed-rate mortgages are at their lowest since September of 1998, according to mortgage-information provider HSH Associates, in Butler, N.J. (Its Web site, www.hsh.com, provides a chart that tracks mortgage rates in relation to the Federal Funds rate.)

Additionally, one-year adjustable-rate mortgages, which last fall stood at about 7.2 percent, are now hovering in the 5.5 percent range.

Refinance boom

The bulk of Quicken's recent business has been in refinances, as homeowners either dip into their equity for cash, or seek lower monthly payments, perhaps to soften the looming recession.

Likewise, Seattle-based HomeStreet Bank is seeing strong refinance activity. "It's a great time to refinance because rates have continued to go down considerably," says Susan Greenwald, the bank's senior vice president and loan-production director.

With 15-year rates currently at 6 percent or less, some customers are trading in their 30-year mortgages — even if their payments don't dip — so they can be mortgage-free sooner. "Even though it's an uncertain economic world out there, in addition to just an uncertain world in general," Greenwald says "we're bracing for a big onslaught of business."

Changes in how lenders do business are sweetening the deal, she adds. Technology is cutting costs and speeding up loan approvals. Appraisals are often shortened. Instead of a full house inspection, which costs borrowers $350 to $400, lenders now may require only "drive-by" exterior inspections that cost as little as $100.

Additionally, lenders are developing new types of loans.

One introduced last month by Washington Mutual is called the 5/1 CMT Interest Only loan. That's because the homebuyer pays just interest during the initial five-year fixed period of the 30-year loan. Available in both conventional and jumbo loans, this product is geared toward homebuyers who expect to stay in their home only a short amount of time.

Will rates go even lower? Only time will tell. Will they climb? Greenwald doesn't see anything on the economic horizon to cause that to happen in the next few months. "If we see a big rebound in the economy, they could go up, but everything is pointing to a continued slowing," she says.

Still, she cautions against waiting for even lower rates before making a move. Quicken's Gilbert seconds that.

"What I know is that we have the lowest rates since 1967, and they don't ring a bell at the top and they don't ring a bell at the bottom. So you may want to consider jumping in."