Average Mortgage Rates

Even when you look for an average mortgage rate, there are slight differences in calculations. To understand the “talk” better, here are a few definitions:

• Fixed Rate – this is an APR (annual percentage rate) that is fixed and does not vary.
• Variable Rate – this is an APR that does vary according to the ups and downs of the federal prime interest rate.
• Prime Rate – this is the rate that mortgage lenders get from the U.S. Government.
• ARM – Adjustable rate mortgage
• 3/1, 5/1, 7/1 – this indicates a type of mortgage and interest rate relationship. These are variable rate mortgage loans that are both fixed and adjustable. The first figure is how many years the rate is fixed at the amount advertised; the second number is how often after that first number of years the rate will be adjusted on a variable (ARM) rate. So, 3/1 means the rate is fixed for three years, after which time it will be readjusted and varied every one year.

According to the May 6, 2010 list on the Freddie Mac website, the 30 Year Fixed rate is 5.00%. The 15 year fixed rate is 4.36%, 5/1 ARM is 3.97%, and 1 year ARM is 4.07%. Freddie Mac is the official government lending agency.

Even the figures published for average mortgage rates vary according to how they are calculated. Some websites publish actual rates for the lowest rates available based on a particular loan amount, while others publish average rates for mortgages of all sizes.

For example, compare the following Bankrate.com benchmark rates for the week of May 5, 2010 on a mortgage amount of $165,000, to the average rate estimates listed above:

• 30 Year Fixed – 5.12%
• 15 Year Fixed – 4.49%
• 5 Year ARM – 4.31%

Rates are compared to a “benchmark” interest rate. These are the lowest rates accepted by an investor for a non-Treasury investment. Investors set this rate by their willingness to invest and at what rate they begin to refuse to invest. A benchmark interest rate is tied to Treasury securities. Investors want to be paid a little above the rate offered by securities.

According to economists, the reason for this particular week’s drop in interest rates to a new low has to do with the unrest currently happening in the country of Greece and with the recent oil spill in the Gulf of Mexico. Fearful of dropping stock market prices, investors moved their money in to safer places. The safer place this week was in American bonds and mortgage-backed securities. What this did was to make more bond money available to back mortgages and therefore, a drop in rates.

Average mortgage rates fluctuate with the global economy. The Mortgage Bankers Association has predicted that rates will rise to 5.8% by the end of the year. Potential buyers should watch the weekly average rate figures closely, and follow happenings in the U.S. stock market and world economy. If the rates begin to slowly rise, it may be time to lock into a fixed rate mortgage for the best deal.