Mortgage rates remain low during February

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Mortgage rates have inched upward in the past several weeks but remain relatively good for homebuyers, despite the Federal Reserve's increase to short-term rates earlier this month.

On Thursday, the average rate on a 30-year, fixed-rate mortgage was 5.69 percent with a 0.7 percent upfront fee, according to a weekly survey by the Freddie Mac corporate mortgage company.

February will be the seventh consecutive month that the average monthly rate has remained below 6 percent.

"Rates remain outstanding," said Dale Eatinger, a mortgage officer with First National Bank of the Rockies in Hayden, who recalled paying 12 percent on his first home mortgage in 1980.

"Any time you have a rate environment as flat as it's been and under 6 percent, that's a pretty good environment," he said.

The low rates have stumped some economists, including Federal Reserve Chairman Alan Greenspan, who, on Feb. 3, raised the federal funds rate for the sixth time since June to prevent unwanted inflation.

The funds rate, a short-term overnight lending rate among banks, was left at 2.50 percent after the rate hike. The move typically increases Treasury note yields, which are used to set long-term mortgage rates.

The rate on a 10-year Treasury note hovered at about 4.27 percent last week, up from 4 percent Feb. 9 -- not as much of an increase as some may have expected.

"I'm a little bit surprised, but until the stock market takes off, people have no choice but to put their money in something secure," Eatinger said. "People are looking for a long-term stable rate; mortgages are offering it."

Long-term mortgages and Treasury notes and bonds are alternative investment options. Yields on Treasury securities fall with growing demand and prices, subsequently keeping mortgage rates down.

Foreign investors, particularly from Japan, China and Germany, are creating more demand for Treasury bonds, and foreign governments also are buying up bonds to keep the value of the dollar from falling.

"A big chunk of our monetary market is foreign money," said Greg Long of White Oak Financial Group.

Long pointed to the federal deficit as one element that could have long-term effects on Treasury note yields and mortgage rates. The higher the deficit, the more Treasury bonds the government will issue.

"Long term, that will hurt interest rates," he said. "As the deficit climbs, rates will climb."

Mortgage experts say watching inflation is the simplest way to gauge what might happen to mortgage rates. Analysts expect the Federal Reserve will continue raising short-term rates throughout the year to combat inflationary pressure, which could be shaped by oil prices and other influences.

"The oil market will continue to affect all aspects of our economy, and interest rates aren't immune to that," Eatinger said.

However, Wall Street's economic predictions typically are priced into rates ahead of time, said Peter Smith of First Western Mortgage Services. It's when Wall Street is surprised by unexpected job reports or other indicators that the markets change.

"Pricing is based on what we expect, and there are predictions every day," he said. "Markets change based on the accuracy of those predictions."

Smith hasn't been shocked by the steady mortgage rates because the market has been adjusted to reflect predictions for higher rates.

"There have been no surprises. The Fed has done what they said they've been planning to do," he said.

-- Jeff Brown of Knight Ridder Newspapers contributed to this report

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