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10/3 FHA Mortgage Rate Update

Since the Federal Reserve announced the second round of Operation Twist, fifty years after the first try, interest rates have plunged even further into a no-man’s-land. The average rate on the 30-year fixed-rate conventional loan is at a record-low of 4.01 percent, according to Freddie Mac as of September 29, 2011. As of October 3, the 30-year fixed-rate loan was at 3.84 percent, according to Mortgage News Daily. Government-sponsored mortgages like the 30-year FHA fixed-rate loan always have lower rates than conventional or jumbo loans. The Federal Housing Administration (FHA) insures private loans on behalf of borrowers who cannot obtain regular financing for some reason.

Recently, the interest rate spread between 30-year FHA loans and 30-year conventional loans has remained relatively fixed, holding steady at 0.22 percent or 22 basis points. As of October 3, the 30-year FHA loan stood at 3.75 percent, which compared with the 30-year conventional loan means a difference of 0.09 percent or nine basis points. The spread between conventional rates and FHA mortgage rates has narrowed significantly. The fall in the 30-year conventional rate was nearly matched by the fall in the 30-year FHA rate to the point where they are only nine basis points apart. This indicates plenty of downward pressure on home mortgage rates in general.

All that pressure is coming from the Federal Reserve’s zero interest rate policy (ZIRP), which now combined with additional downward pressure from Operation Twist, promises to keep rates down for a long while. Operation Twist is heralded as another move to essentially force consumers to start borrowing, investing and spending again. By selling short-term Treasurys and buying longer-term Treasurys, the central bank hopes to invert the yield curve. That is, the Federal Reserve hopes to raise short-term interest rates and lower long-term rates even further.

Their intention is having an effect. For the first time in many months, yields on short-term government bonds have risen a little. Yield on longer-term bonds like the 10-year and the 30-year have fallen below two percent and three percent, respectively. FHA mortgage rates are feeling the pressure to fall, as are regular mortgages like the 30-year and 15-year conventional loans. Low home mortgage rates would, in theory, help to re-activate the housing market. Price action on the 10-year, which is used as a benchmark for mortgage loans, has seen renewed dips below two percent, which would indicate lower mortgage rates in the near future.