Mortgage rate drop delights - Levels on Thursday were at their lowest in eight months

On a warm July day just before a searing heat wave hit Sacramento, economist Frank Nothaft predicted from his Washington, D.C., office that mortgage rates would stay below 7 percent the rest of 2006.

On Thursday, the chief economist for federal mortgage giant Freddie Mac extended the prediction through 2007.

Mortgage rates, which tumbled to their lowest levels in eight months Thursday -- 6.24 percent for a fixed-rate 30-year loan -- will average 6.5 percent next year, he said. That represents improved news for a national housing market he believes will bottom out during the first quarter of 2007 and see sustained positive indicators about midyear.

Though high compared to the historically low rates of 2003, 2004 and much of 2005, 6.5 percent "is still a pretty low rate," Nothaft said in a telephone interview. "And you can expect the economy to continue to expand, and there's no recession forecast for 2007."

A year ago, 30-year fixed-rate loans averaged 6.37 percent.

Early in 2006, many lenders feared 7 percent interest rates would be a psychological barrier that would further clobber a weakening housing market. But for four months since rates peaked at 6.8 percent in July, their downward drift has been one of the market's shining lights.

Analysts and lenders say rates' continued stability makes it easier to qualify more would-be homeowners.

Borrowing $300,000 at Thursday's 6.24 percent rate trims a monthly payment by $110 -- or $1,320 a year -- from the same loan at July's 6.8 percent rate.

The California Association of Realtors, too, predicts that 30-year fixed-rate loan rates will remain in the 6 percent range through much of 2007. The association's deputy chief economist, Robert Kleinhenz, told Sacramento-area real estate agents this week the Federal Reserve may even cut interest rates by midyear.

Home builders also believe rates will be steady in 2007.

"They may go down slightly, may go up slightly, but for the most part they will remain stable. That's my guess," said Barry Grant, a Sacramento-based division president for Los Angeles-based KB Homes, one of the region's largest builders.

The downward trend also has prompted new interest in refinancing existing loans, said Jon Dobbel, Elk Grove branch manager of Summit Funding.

"I definitely have noticed the phones picking up for refinancings," he said Thursday. "A lot of people in three-year ARMs (adjustable-rate mortgages) now sense this might be the right time to get out of them."

Freddie Mac, established by Congress in 1970 to buy residential mortgages from private lenders, reported Thursday that rates for all loans fell this week.

The 15-year fixed-rate loan averaged 5.94 percent, lowest since March. A year ago, it averaged 5.90 percent.

One of the most popular loans, the five-year adjustable mortgage -- in which rates are fixed for five years, then can be adjusted to newer rates -- fell to 6.04 percent this week. A year ago, the loan averaged 5.86 percent.

The one-year adjustable loan -- in which rates are fixed for one year, then can be adjusted to a new rate -- fell to 5.53 percent. Loan rates peaked at 5.83 percent in July.

The mortgage rates don't include points, an add-on fee, that averaged 0.5 percent this week, Freddie Mac reported.