Economy up, interest rates down

All systems were go for borrowers this week as interest rates dropped again and the U.S. economy showed new signs of recovery.

The average interest rate on 30-year fixed-rate mortgages was just 5.0 percent during the week that ended Sept. 24, 2009, according to Freddie Mac's weekly survey. The average interest rate on 15-year fixed-rate mortgages was just 4.46 percent, the lowest since Freddie Mac began to track this rate in 1991, and the average interest rate on five-year hybrid adjustable-rate mortgages (ARMs) was even lower at just 4.51 percent.

“Mortgage rates held relatively steady at three-month lows this week,” said Freddie Mac Chief Economist Frank Nothaft.

Fed policies keep interest rates low
Meanwhile, the Federal Reserve reported that economic activity has picked up. In a Sept. 23 statement, the Fed said that financial markets have improved, home sales have increased, household spending seems to be stabilizing and businesses have continued to make progress toward aligning inventory levels with sales.

The Fed also said it will keep the benchmark federal funds rate at just zero to 0.25 percent and continue other policies that have helped to support mortgage lending and home sales.

"Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the Fed said.

The Fed doesn't set rates borrowers pay for mortgages, auto loans or credit cards. But bank rates set by the Fed strongly influence the general direction of interest rates on those types of consumer loans. The Fed's current actions, policies and outlook mean borrowers could continue to see low interest rates for some time.

More new mortgages, more home sales
Low interest rates and better economic conditions have prompted a surge in applications to get new home loans, according to the Mortgage Bankers Association. Applications to refinance or to purchase a home with a government-insured mortgage were especially strong.

Home sales softened slightly in August, but only after four months of dramatic increases, according to the National Association of Realtors. If the pace so far this year continues, approximately 5.1 million homes will be sold.

Altogether, low interest rates, a stronger economy and strengthening home sales are good news for borrowers looking to buy a new home or refinance an existing mortgage.

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