Mortgage rates drop to four-year low, may spark sales

Interest rates for 30-year, fixed-rate mortgages have dropped to just above 5 percent, a four-year low, and suburban lenders and real estate agents are hoping the decrease will spark a recovery of the housing market.

"If history repeats itself, I absolutely think housing will lead us out of the recession," said Andy Starck, chief executive officer of Prudential Starck, Realtors, based in Palatine. "This is a huge thing-who wouldn't want a mortgage at 5 percent."

The decrease, which according to Freddie Mac figures produced the lowest mortgage rates in four years, is attributed to increased investor confidence since the U.S. Treasury Department announced it would buy mortgage securities issued by Freddie Mac and Fannie Mae.

So far, lenders report an increase in applications for refinancing. And the number of homeowners inquiring about how much they can afford to spend on a home--often the first sign that sales will rise--also has jumped, said Frank May, senior loan consultant with Green Valley Mortage in Bloomingdale.

The Mortgage Bankers Association, a national industry organization, reported a dramatic increase in the number of refinancing applications over the last four weeks and a slight increase in purchase applications.

Jim Linnane, senior vice president and division sales manager for Wells Fargo, said his company has seen a surprising increase in home purchases caused by the drops in both home prices and interest rates.

"Affordability is a very significant factor right now," he said, adding that when compared with income home prices might be at a record level of affordability in the Midwest.

Lenders said FHA mortgages might be the best bet for home buyers who do not have a house to sell because the down payment required is currently only 3 percent, and closing costs can be paid by the seller or rolled into the mortgage.

FHA loans can be for as much as $417,000, but after Dec. 31 that number is scheduled to decrease to $365,700 in the Chicago area, said Marve Stockert, executive director of the Illinois Association of Mortgage Professionals, based in Lombard.

Consumers must realize money is available even with low down payments for people who can prove their income, said Linnane.

Stockert said the biggest problem in the housing industry today is that some people cannot refinance to lower their mortgage payments because their home value is not high enough and might even be less than what they owe.

While homeowners should compare the costs of refinancing to the reduction in their monthly payments, generally homeowners with mortgages above 6 percent should consider refinancing, said John Bloss, Libertyville branch manager for Alliance Financing Mortgage Company.

May said he favors refinancing for anyone with an adjustable-rate mortgage.