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30-Yr fixed 4.750 % 0.7 to 1
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FHA Mortgage – Rates Update 9/25

The Federal Housing Administration (FHA) insures private home loans for borrowers who are otherwise unable to avail themselves of home loans. If the borrower defaults, the federal government will pay the private lender. This guarantee helps keep FHA mortgage rates lower than comparable private loan rates. In an environment of strong downward pressure on interest rates, this means borrowing costs for FHA loans are at their lowest in decades. The Federal Reserve’s zero interest rate policy (ZIRP) combined with low yields on mortgage-backed securities and low yields on government bonds has resulted in the lowest mortgage rates in living memory.

Currently, a 30-year fixed-rate loan stands at 4.10 percent, the lowest level in years, as of September 21, 2011. The FHA 30-year fixed-rate loan stands at 3.77 percent, a difference of .33 percent or 33 basis points. By comparison, the week ending September 15 had the 30-year loan at 4.32 percent. Conventional 30-year fixed-rate loans dropped by .22 percent or 22 basis points. FHA 30-year fixed-rate loans stood at 3.99 percent as of September 9, 2011. FHA 30-year loans also declined by .22 percent or 22 basis points. The .33 percent difference appears to be priced in fairly robustly for it to hold over that time period.

On Wednesday, September 21, 2011, the Federal Reserve announced “Operation Twist,” the name hearkening back to a similar program conducted during the 1960s. The central bank will sell $400 billion of its bonds with maturities of less than three years and use the proceeds to purchase securities with maturities between six and 30 years. In addition to its pledge on August 9 to keep interest rates at effectively zero percent until mid-2013, this will add further downward pressure to 30-year mortgage rates. Already, the government bond market is reacting to this new development, with 30-year bond yields plunging 14 basis points to 3.07 percent, the lowest since January 2009.

Next week, FHA mortgage rates will likely be even lower, thanks to the 30-year bond’s reaction to the Federal Reserve’s announcement. The lowest mortgage rates in generations will probably hit new record lows in the coming weeks as the market continues to price in Operation Twist. Lower long-term borrowing costs will probably not have much positive impact on economic conditions. Unemployment is still too high and the outlook too uncertain for any central bank moves to have an effect. Low mortgage rates are here to stay for the moment.