Mortgage Rates Fall to 5-Month Low

Mortgage rates slipped slightly this week, remaining near record lows despite growing concerns about a potential U.S. debt default.

The benchmark 30-year fixed-rate mortgage fell 5 basis points this week, to 4.77%, according to the national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 4.96%; four weeks ago, it was 4.96%.

The benchmark 15-year fixed-rate mortgage fell 5 basis points, to 3.95%. The benchmark 5/1 adjustable-rate mortgage fell 4 basis points, to 3.48%.

This is the lowest rate on the 30-year fixed in more than five months. In Bankrate's survey on Dec. 1, the 30-year fixed was 4.71%. In the nearly 26-year history of Bankrate's weekly mortgage rate survey, the record low has been 4.42%. It has reached that level twice: Nov. 3 and two weeks before that.

The low rates surprise many mortgage experts, who expected the rates to rise after the United States officially reached its $14.3 trillion debt ceiling on Monday.

"It's a surprise to everybody," says Brett Sinnott of CMG Mortgage in San Ramon, Calif. "But come Aug. 2 if the debt limit is not raised, interest rates will spike right away."

Debt Crisis

Treasury Secretary Timothy Geithner is using a series of maneuvers to maintain the debt level until Aug. 2. But he says if Congress doesn't raise the debt limit by the deadline and the United States defaults on the debt, the economy will suffer catastrophic consequences, including an inevitable spike in interest rates.

Sinnott says he expects mortgage rates would increase as much as 50 basis points in the event of default.

That's because many major investors would pull out of the U.S. bond market, which would lower demand, causing Treasury prices to fall. When bond prices decline, yields increase. Higher bond yields normally translate into higher mortgage rates.

Some Experts Find Default Unlikely

Despite the tension in the market and Geithner's warnings, it is unlikely the government will default, says Scott Eggen, senior vice president of capital markets at PrimeLending in Dallas.

"It's going to go to an eleventh hour, and it's going to get done," Eggen says. "Democrats will raise the debt ceiling a little and Republicans will get some spending cuts. But in the end, they are going to raise the debt ceiling."

The United States has raised the debt limit 74 times since 1962, including 10 times since 2001, according to the Congressional Research Service.

In many of those instances, Congress voted to raise the debt limit without much controversy but this time, because of the country's soaring debt and political battles, it remains unclear when and by how much that limit would be raised.

"A lot of it is going to have to do with how quickly they act on it and by how much they are going to raise it," Sinnott says. "You could see higher rates even before that Aug. 2 deadline."

Spike Would Worsen Housing Market

A spike in rates would push many potential homebuyers out of the market and could cause home prices to fall lower than they already have dropped.

"It's a double whammy," Sinnott says. "If their monthly payment is higher, their income may not be sufficient to qualify for a mortgage. And with higher rates people are going to want lower payments, so sellers will have to lower the prices."

Eggen thinks the economy is too fragile still to endure higher rates, which is why he doesn't expect them to rise anytime soon, he says.

"It's all about food and energy and consumers getting pinched a little more with gas prices," says Eggen. "Look at the unemployment situation, the housing market ... the people who are underwater. I don't think rates are going anywhere anytime soon."

Prudent to Lock

Alan Rosenbaum, chief executive officer at GuardHill Financial Corp. in New York City, disagrees that rates will remain low for long.

"These rates are surprisingly low and they couldn't have come at a better time, but I wouldn't predict it to last very long at all," he says. "Remember, they come down slowly but they go up very quickly."

When in doubt, the prudent move is to take advantage of the low rates and lock, Rosenbaum says.

"When you lock in a rate you can always reduce your rate prior to closing if they fall, but if you fail to lock and rates go up, you can never go back and change it to the old rate."