4.25% 30 Year Fixed Rate
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30-Yr fixed 4.750 % 0.7 to 1
15-Yr fixed 3.750 % 0.7 to 1
5/1 ARM 3.125 % 0.7 to 1
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FHA Mortgage Rate Update

The Federal Housing Administration (FHA) extends credit to borrowers with low incomes or poor credit ratings. Loans from this agency are insured against default, with the private lenders being the beneficiary of such insurance. This is an incentive for them to advance the loan in the first place, which is the entire point and purpose of the FHA. FHA mortgage rates, like other mortgage rates, have been dropping precipitously in response to downward pressure from two sources: extremely low interest rates and low yields on government bonds. The Federal Reserve’s zero interest rate policy (ZIRP) and historic low yields on Treasury securities have created a low-rate environment.

As of September 6, 2011, the FHA 30-year fixed-rate loan had fallen to 3.88 percent, a record low rate in and of itself. In 2010, financial professionals and commentators were warning that record low current FHA mortgage rates would not last into 2011. Little did they know that FHA mortgage rates would be making new lows as late as September 2011. Compared to the conventional 30-year loan at 4.14 percent, the FHA 30-year would seem to have an advantage. This is purely because of the fact it is insured against borrower default by the federal government. This makes private lenders more willing to extend credit at lower rates of interest.

The downward pressure on interest rates was exacerbated recently with the Federal Reserve’s announcement of the continuation of ZIRP for another two years. Yields fell across the board, sending waves of influence throughout the economy. The corresponding bond yield for the FHA 30-year loan is actually the 10-year Treasury note. The average duration of a 30-year loan is actually seven years, so the market uses the 10-year as a benchmark. Since the 10-year has hit new record low yields below two percent, this exerts significant influence on current FHA mortgage rates.

For the foreseeable future, the interest rate on the FHA 30-year loan will continue to fall as influences from the Federal Reserve and the bond market work their magic. As new record lows are reached, refinancing activity will spike as homeowners race to take advantage of the opportunity to lower monthly payments. The refinance “boom” will appear to behave strangely as refinancing activity moves in fits rather than a smooth progression. Interest rates will stay low for the next two years, unless the Federal Reserve feels pressured to act by rising inflation or makes changes to its macroeconomic policy.