Daily Mortgage Update by Interest.com

Our new survey of major lenders found the average cost for a 30-year fixed-rate loan the most popular way to pay for a house fell to 6.57% from 6.65% last week.

After steadily rising for two years, the cost of financing a home seems to have peaked at 6.93% in late June. Now we expect them to drop a little more over the next couple of weeks and then level out at around 6.5% by early fall.

While rates are still higher than they've been in four years, this is the best news anyone trying to buy or sell a house could have hoped for.

We're still paying just one-and-a-quarter points more than during the summer of 2003, when rates reached record lows.

Home loans still cost less than they did throughout the mid- to late-90s, when 7% and 8% was the norm, and we're no where near the double-digit rates of the 80s and early 90s.

The decline began right after the Federal Reserve Bank decided to make borrowing more expensive in late June. Many economists and investors thought that would be the end of the Fed' two-year campaign to push rates higher -- and they were right.

At 17 straight meetings, dating back to June 2004, Fed policymakers had sought to fight inflation by raising the interest rate it charges banks to borrow money.

When lenders pass that cost along to us by charginng more for mortgages, credit cards, home equity and auto loans, we're supposed to spend less, making it more difficult for everyone from furniture makers to hair stylists to raise prices.

At its Tuesday meeting, the Fed decided not to raise rates again.

But anyone buying a home -- or facing big increases in their adjustable rate mortgage or credit card payments, for that matter has already felt the effect of the Fed' actions.

A 30-year fixed-rate loan cost 5.96% this time last year and 5.28% in June 2003. That was the lowest average rate Interest.com (and its ink-on-paper predecessors) has recorded since its weekly survey or major lenders began in 1985.

Even though rates on all types of mortgages peaked in late June, we're still paying more than we were last summer. In our most recent survey:

• 15-year loans averaged 6.35%, up from 5.56% one year ago.
• 30-year jumbo loans (for more than $417,000) fell to 6.95% from 7.05% last week -- closer to the 6.8% to 6.9% level it' been hovering at, but up from 6.03% this time last year.

Introductory rates for adjustable-rate mortgages, or ARMs, are rising even faster. Those 30-year loans offer a fixed rate for one to seven years. After that the rate is adjusted each year. If interest rates go up, you pay more. If they go down, you pay less. ARMs with an initial fixed rate for:

• One year, averaged 6.01% this week and 4.89% one year ago.
• Five years, averaged 6.32%, up from 5.62% one year ago.

Here's what that means when you reach for your checkbook if you took out a 30-year, fixed-rate loan for $150,000 at:

• At today's rate of 6.57%, your monthly payment of principal and interest only would be $955.
• At last July's rate of 5.96%, your payment would have been $895 or $60 a month less.

At June 2003's rate of 5.28%, your payment would have been $831 or $124 a month less.

The Federal Reserve's decision not to push rates higher on Tuesday was a turning point because its policy-making committee had raised interest rates a quarter-point each of the last 17 times it has met, dating back to June 2004.

It's not that inflation is clearly under control.

The most recent report shows inflation is running at an annual rate of 4.7% for the first six months of the year -- considerably higher than the 3.4% increase for all of 2005.

The core inflation rate, which excludes volatile energy and food prices, and is considered a better gauge of what's happening in the overall economy, shot up at a 3.2% annual rate during the first half of the year.

It hasn't grown that fast since the first six months of 1995 and its certainly rising more quickly than what's widely accepted to be the Federal Reserve's target of 2% annual growth.

But last month Fed Chairman Ben Bernanke told a Senate committee that the economy appeared to be slowing enough to rein in inflation.

That sentiment was echoed in the Fed's official statement on Tuesday: "Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and inflation pressures seem likely to moderate over time."

Even if the Fed feels compelled to impose another quarter-point increase sometime this fall, mortgage rates have fallen enough that they should go no higher than 6.8% to 6.9% by the end of the year -- or back to where they were in June.

So here's our best snapshot of what's going on in the housing market right now:

Over the past few years sellers could demand higher and higher prices for their homes, and buyers could afford to pay them, because the cost of borrowing money was at or near record lows.

Now borrowing is more expensive. Buyers can't afford to pay as much as they did last year, or just a few months ago. As a result prices are leveling off or falling in most, although not all, cities.

But these are mortgage rates we can definitely live with. If buyers and sellers temper their expectations just a bit, life can go on very nicely.

By Mike Sante

Interest.com Managing Editor

Have a question about your finances? Ask us at editors@interest.com

Source: Interest.com All rights reserved. Copyright Interest.com