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Fed Cut Sparks Mortgage Rate Bargains

Homeowners are cashing in on low interest rates. Will they stay low?

Mortgage rates are dipping down further in the wake of the Federal Reserve's recent half-point cut in interest rates. Homebuyers are of course taking it to the bank and cashing in on reduced mortgage payments. Homeowners are hustling to refinance their existing mortgages, too. According to Freddie Mac's Primary Mortgage Market Survey, the 30-year fixed-rate mortgage averaged 6.89 percent, with an average 1.0 point, for the week ending March 23, 2001. That's more than one and a quarter percentage point less than a year ago when the interest rate was 8.23 percent. But it wasn't long ago, just January 12, when the rate was exactly the same, 6.89. Perhaps consumers can hope that rates will stay below 7 percent.

The average for the 15-year fixed rate mortgage was 6.44 percent, with an average 1.0 point, and that's the lowest rate in more than a year. For one-year Treasury-indexed adjustable-rate mortgages, the rate averaged 6.22 percent this week, with an average 0.9 point. This is the lowest the 1-year ARM has been since the week ending October 1, 1999, when it averaged 6.12 percent.

The housing market continues to be strong, and lower interest rates are sustaining that key part of our economy. "The Federal Reserve's recent cut in interest rates and a continued concern over weakness in the overall economy contributed to another drop in mortgage rates this week," said Frank Nothaft, deputy chief economist for Freddie Mac. "In spite of the slowdown in other sectors and a lessening of consumer confidence, declining mortgage rates since the first of the year have helped to support housing activity.� And lower rates should continue to fuel the housing market well into the spring buying period."

The Fed's action was taken to cushion the effects of weakening economic growth in the United States and of a slumping stock market. The Fed, on the other hand, disappointed the stock market with the modest half-percent cut. Economists say that the Fed's slow response diminishes the real-time impact on the stock market and overall economy, if there were any impact to be made. The Dow Jones index continued to drop the day of the Fed announcement, and slid further on Wednesday before rebounding finally on Thursday and gaining back almost all the ground lost during the week.�

The Dow was down 19 percent from its peak of 11,722 in January 2000. The NASDAQ index is in retrograde. It has lost 63 percent of its value from a peak on March 10, 2000 for a total loss in value of almost $4 billion. The larger business picture reflects a retrenchment. The consensus estimate for corporate earnings in 2001 is 10 percent below last year's results.

Real estate may be a sound investment. But home prices continue to rise, making home ownership an expensive proposition. (The question is whether that investment could lose some sparkle should home values depreciate in an economic downturn.) Current interest rates provide at least some relief from sticker shock. If you're still not satisfied with the average 6.89 percent on a 30-year mortgage, take a look back 17 years ago. In October 1984 the average rate was 14.13 percent with 2.6 points.

Sources used to create this article include Freddie Mac, the Washington Post and the Associated Press.