Mortgage Rates Drop Below 5 Percent: 4 Things to Know

With all the doom and gloom in the housing market, you might have missed this nugget of good cheer: 30 year, fixed mortgage rates have fallen below 5 percent—to 4.96 percent—for the first time ever, according to Freddie Mac. Lower rates have already triggered a wave of refinancing applications and could work to spark some much-needed demand in the housing market. Here's five things you need to know about the trend:
1. Uncle Sam is behind the dive: Fixed mortgage rates have been falling in recent months for a number of reasons, such as lower inflation and investors' flight to quality, which has helped drive down yields on 10-year treasuries. (Fixed mortgage rates typically track the yields on 10-year T-bills.) More important, the Fed has recently undertaken an initiative to purchase hundreds of billions of dollars in Fannie Mae and Freddie Mac debt and mortgage-backed securities. The Fed also has suggested that it may begin buying long-term treasuries directly. Both moves have been big factors in the decline.
[Check out Mortgage Rates in 2009: 7 Things You Need to Know.]
2. The long-term outlook remains favorable: Although rates could certainly increase from these record-breaking levels, they should remain attractive for the rest of the year. Thirty-year fixed mortgage rates will "wax and wane" in the 5½-to-6 percent range before closing out the year somewhere between 6 and 6¼ percent, Keith Gumbinger of HSH Associates, told me recently. "That's still very attractive," he said. "There is no reason to think that rates are going to go up so substantially so as to erode the marketplace." CLICK HERE TO VIEW THE ENTIRE ARTICLE