It was an eventful week in financial markets, and the mortgage market was no exception. With the Federal Reserve taking additional measures to combat the threatening credit crunch, including another interest rate cut of three- quarters of a percentage point, there was tremendous volatility in mortgage rates. Adjustable mortgage rates continue to climb as investors unload bonds backed by such loans and investor demand for new ARMs has sharply dropped.
Fixed mortgage rates dropped sharply but still remain well above the level they would be in the absence of a credit crunch. The spread between conforming mortgage rates and yields on risk-free Treasury notes is more than three- quarters of a percentage point wider than normal. Jumbo mortgage rates are near 7.5 percent, reflecting the liquidity issues ailing the credit markets. Despite another substantial interest rate cut by the Federal Open Market Committee, mortgage rate movements have been driven by the credit crunch rather than anything the Fed has been doing with interest rates.
The mortgage rate winds can change direction quickly. Last week, the average 30-year fixed mortgage rate was 6.39 percent, meaning that a $200,000 loan would have carried a monthly payment of $1,249.70. With the average conforming 30-year fixed rate now 5.98 percent, the same $200,000 loan carries a monthly payment of $1,196.53.
