Nov 16 2006 12:00AM | Permalink | Email this | Comments (3) |
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30-year fixed mortgage rates have drifted down to a 6.3-6.4% range in the last eight weeks from 6.8% at the beginning of the summer. At 6.33%, the contract rate for 30-year fixed mortgages is now the same as the average rate in November 2005. But the annual percentage rate (APR) is now slightly less than a year ago. The APR includes the impact of loan origination points, required loan fees and some of the other borrowing related costs. This version of the mortgage rate, which every lender is required to provide to loan applicants, is used when prospective homebuyers make the final decision on how large a monthly payment they can afford.

Savvy mortgage brokers know this. Look at their ads. Like auto dealers learned years ago, they now make the monthly payment the highlight of their ads and reduce the contract rate to footnote status.

Mortgage APR’s have declined 4-5 basis points from a year ago relative to contract rates. Two basis points of the decline are because origination points have been reduced to 0.4 from 0.6. The rest is because other loan fees and costs have been reduced. Mortgage applications and processing have moved to the Internet resulting in significant cost reductions.

This 4-5 basis point change either reduces the down payment by $500 or cuts the monthly payment by $3.25 for a 100,000 30-year loan. This is not a lot but it is a small positive for home sales. And it is probably an underestimate of the impact since costs included in the APR calculation are also declining. Some of the drop in points and costs is a response to the recent decline in mortgage applications and will be reversed in a stronger market. But mortgage points and costs are clearly on a sustained downward trend.

The current mortgage APR has declined as much as 20 basis points relative e to the drop in the contract mortgage rate since the previous strong housing market in the 1990s. Today’s contract rate of 6.33% is equivalent to a contract rate of 6.53% in the 1990s.