Average interest rates on mortgage loans around the country decreased in the latest week, bearing good news for eager borrowers but reflective of a slower economy in general.

“Interest rates for fixed-rate mortgages continue to drift down as reports of economic weakness persist,” said Frank Nothaft Thursday, vice president and chief economist for mortgage giant Freddie Mac. “…However, the housing front is providing some encouraging signs. The pace of home price declines slowed down for the fourth straight month in June and the number of metro areas exhibiting monthly gains rose from seven to nine… There are also signs more buyers may be getting ready to return to the market.”

The average rate on a 30 -year fixed rate mortgage fell to 6.40 percent, excluding points, during the week ended August 21, 2008, down from 6.47 percent the previous week. The current rate is also down significantly from one year ago when it stood at 6.67 percent.

Fifteen-year fixed rate home loans carried an average interest rate of 5.93 percent, down from 6.00 percent the week before and from 6.12 percent during the same week of 2007.

Rates on one-year adjustable rate mortgages (ARMs), however, rose to 5.33 percent from 5.29 percent one week earlier, but were much lower than the 5.84 percent rate of a year ago.

Mortgage interest rates generally follow market opinions about overall economic health. When the economy is perceived to be flourishing, interest rates tend to increase. Yet if analysts on Wall Street predict financial doom and gloom, rates tend to fall.

While mortgage rates did fall in the past week, there are some new rays of light for the home loan industry. During the same time, applications for mortgage loans increased slightly for the first time in the three weeks, according to the Mortgage Bankers Association, indicating a small jump in home buying activity. Additionally, the MBA’s figures signal an incremental rise in the number of homeowners taking advantage of refinancing options.

And while no one expects a dramatic comeback of the housing market, recent interest rate and application data as well as other indicators are giving economists hope that the “bottom” is here or at least very near.  An index of national house prices for the second quarter, released Tuesday and known as the Standard & Poor’s/Case-Schiller index, showed a drop of 15.4 percent in home prices, but also revealed that prices were falling at a slower pace than in previous months.

“If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”

Even in the face of rising inflation, the Federal Reserve is unlikely to raise their target interest rate through the end of 2008, based on comments Friday from Fed Chairman Ben Bernanke.

“The Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures,” Bernanke said in a speech at the annual economic symposium in Jackson Hole, Wyoming. He explained that this strategy is based on the Fed’s expectation “that the prices of oil and other commodities would ultimately stabilize… and that this outcome…would foster a return to price stability in the medium run.”

Bernanke went on to say that he is encouraged by the “recent decline in commodity prices, as well as the increased stability of the dollar,” and that,  if the Fed does not interfere by increasing its interest rate, these conditions would lead to a better pace of inflation by the beginning of next year.

During the past year, the Federal Reserve has decreased its federal funds rate from 5.25 percent to 2 percent, in response to meltdowns in the financial and mortgage markets. Yet because of lower interest rates as well as soaring oil and food prices, consumer inflation has risen from 2 percent to a rate of 5.6 percent during the same period.

In order to get inflation under control, some on the Fed board say an increase in the target rate is the only solution. “If we don’t reverse our accommodative stance sooner rather than later, we will face rising inflation, which may be costly to deal with,” Philadelphia Federal Reserve Charles Plosser said in an interview published  Monday in the New York Times.

Still others support Bernanke’s position, saying that most economic players, particularly mortgage lenders and bankers, are not ready for a rate hike. Janet Yellen, president of the San Francisco Fed argued, “Lenders have been hit by a shock so severe that they are contracting and withdrawing from private sector lending.”

The FOMC meets again in mid-September to determine if any interest rate changes are necessary.

Based upon search engine data, these are five of the most frequently asked mortgage questions:

MORTGAGE ORIGINATION QUESTIONS

Q. How much can I borrow for a mortgage?

A. When answering questions of this type, two major factors must be taken into consideration; the borrower’s monthly income and the amount of money he or she has for a down payment. Most banks expect at least a 20% down payment, although there are some exceptions. It is also important for the borrower to have a reliable monthly income, which can cover the monthly payment and other necessities.

Q. How does a reverse mortgage work?

A. Reverse mortgages are frequently obtained by seniors that have a substantial amount of home equity. They work by converting home equity into monthly cash payments, which the homeowner receives. This can make it easier for a retired person to afford basic expenses, although it will eventually deplete the home’s equity and diminish the value of inheriting it.

Q. What is Private Mortgage Insurance (PMI)?

A. Private Mortgage Insurance is a type of insurance that insures the lending institution against a borrower’s inability to repay the loan. Banks typically require this when the homebuyer doesn’t have a large down payment. In some situations, the borrower pays a monthly fee for PMI. Other mortgages use LPMI, which is similar except that the cost is included in the interest rate.

MORTGAGE PAYMENT QUESTIONS

Q. How do I calculate a mortgage payment?

A. There is no simple formula for calculating monthly payments with sufficient accuracy. It is most effective to use an online, software-based, mortgage calculator, or handheld loan calculator. Booklets of payment calculation tables are also available. To calculate these payments, it is necessary to know the term (number of years), the interest rate, and the amount of money borrowed.

Q. How can I pay off a mortgage fast?

A. If it is affordable for the borrower, refinancing a 30- or 40-year loan term to 15-years will speed up repayment and save money on interest. Another option is to make extra payments, in addition to the normal monthly payment. However, a homeowner who does this should verify that his or her loan does not have a “pre-payment penalty” to discourage early repayment.

If you have questions not answered here, see our other entries for answers to additional frequently asked mortgage questions.

Bill Gross, chief investment officer at Pacific Investment Management Co., believes that tighter lending conditions will alter the U.S. housing market for years according to his April Investment Outlook note.

The note, titled “Grim Reality,” addresses the debate in financial markets about whether woes in the subprime mortgage sector would spread more broadly in the housing market and economy as a whole. “Bulls and bears argue over Web sites as to the percentage of all lending that subprime and alternative mortgage loans provide,” Gross wrote. “But while important, the argument obscures the critical conclusion that tighter lending standards and increased regulation will change the housing outlook for some years to come,” he added.

Additionally, Standard & Poor’s Ratings Services said there has been a significant slowdown in the rate of new entrants in the U.S., as the challenging credit environment has not been supportive of new issuers or new debt offerings.

The ratings agency said in the first quarter of 2008, there were only 29 new entrants to the rated population, down from 98 in the first quarter of 2007. This is the slowest first quarter by newly rated issuers since 1991. It added with profits still at risk within a weaker economic environment, it sees a continued slide in credit quality, with downgrades outpacing upgrades in both investment grade and high yield.

S&P also said it sees an increase in the trailing-12 month speculative-grade default rate to 4.7% by the end of the first quarter of 2009.

Though credit conditions remain challenging, there have been some initial signs of improvement for corporate bond prices, both the high-yield and investment-grade markets have rallied since mid-March, the ratings agency noted.

The FOMC stands for the Federal Open Market Committee, which is a branch of the Federal Reserve Bank. Basically the FOMC is the policy making arm of the Federal Reserve.

Eight times a year the FOMC meets to assess the marketplace and the make decisions based on those assessments. During the meetings of the FOMC 12 reserve banks from around the nation are represented. While the decisions that the FOMC makes only directly impact funds held by the Federal Reserve Bank, they have a ripple effect on the market in general, and the results of FOMC meetings are eagerly awaited by the finance industry.

Of the FOMC 12 members, 7 come from the Federal Reserve Bank Board and are appointed by the President of the U.S. The president of the New York Reserve Bank has a permanent seat on the committee with full voting rights and the remaining four seats are filled on a rotating basis with presidents of the various reserve banks. Each president serves with voting rights for one year before stepping down to allow another president to take his or her place, ensuring even representation.

The goal of the FOMC is to maintain a stable and healthy economy with high employment rates and reasonable rates of credit. If inflation is running rampant, the FOMC may choose to restrict available credit to reduce it, or it may choose to slash interest rates and make more credit available to stimulate a sluggish economy. The voting members carefully weigh the available information and forecasts when they vote behind closed doors, and then the results are released to the public, usually triggering a radical response on the open market.

In addition to eight regularly scheduled meetings, the FOMC can also meet on short notice in a case of national emergency or urgent need. The committee is capable of making rapid decisions to ward off potential economic instability, and the Federal Reserve Bank, along with the nation, relies upon the FOMC to make positive choices for the American economy.

Eliminating the need for a down payment makes buying a home easier and lets the borrower keep more money to save or use for other purposes. However, the current mortgage industry and housing market situation has reduced the options for buying a home with zero down (also known as “100 percent financing”). Nonetheless, it remains possible for some types of borrowers.

As an indication of the zero down mortgage’s decreasing availability, the web site of Ameristar Mortgage Corporation has a notice stating that some of their loan programs have come to an end, and fewer types of no money down mortgages remain available. It attributes these changes to recent developments regarding Freddie Mac, Fannie Mae, and the mortgage insurers. Many banks have completely ceased this type of lending; for example, Reuters reported in March 2007 that Countrywide had stopped supplying “no money down” loans to any of their new borrowers.

Wells Fargo Home Mortgage continues to maintain a web page for mortgage offerings with little or no downpayment, but currently it only lists loans insured by the Department of Veterans Affairs as an option for buying with a zero down mortgage. A few lenders are still offering “80-20″ mortgages, also known as “tandem” or “piggyback” loans. This strategy combines two separate mortgages (one larger, the other smaller) to make home buying with zero down possible. Like other “no money down” mortgages, these loans have become difficult to obtain.

An alternative option is to acquire downpayment assistance from a local organization or government agency which offers this service. Some of these programs supply a single lump sum grant for use as a downpayment; others provide borrowers with low or zero interest loans to pay for their down payments. However, the availability of these programs may also decrease. The AmeriDream Down Payment Assistance Program recently issued a press release criticizing legislation that puts new restrictions upon such assistance; the law will take effect in October ‘08.

Basically, buying a home with zero down has become much harder than it was in the past. When a bank can be located that continues to offer such loans, it will most likely demand that the borrower have a very good credit record and stable income. It should also be kept in mind that closing costs and other initial expenses still must be paid when buying a home in this manner.

Mortgage protection is a type of insurance which covers mortgage payments or pays off the entire mortgage when the home owner becomes physically unable to continue making payments. Different types of mortgage protection insurance cover unemployment, disabilities, illnesses, injuries, and/or death. Read on to learn more about what mortgage protection is, how it works, and how much it costs…

This type of insurance typically repays the entire mortgage if the beneficiary passes away. When other forms of protection are offered (medical, unemployment, etc), it usually makes the monthly payments until a certain number of years have elapsed or the borrower becomes able to start making payments again. Mortgage protection should not be confused with Private Mortgage Insurance (PMI), a different type of coverage which compensates the lender if the borrower stops making payments for financial or other reasons, but does not provide any direct benefit to the home owner.

As with other types of insurance, the beneficiary will have to obtain quotes, apply, gain acceptance, and pay monthly premiums. The premium rates depend upon the loan balance, beneficiary’s age, current health-related factors, the level of coverage for additional family members, and other conditions. MortgageProtection.com lists some sample premiums on their web site (based upon $250000 worth of coverage), such as $11.38 dollars per month for a thirty-five year old male, or $112.44/month for a sixty-five year old. Some insurers offer online quotes in exchange for completing a short form.

Although mortgage protection premiums are higher for people at an old age, the benefit decreases as time passes, because the beneficiary has paid off more of his or her loan. Some insurers offer a “Return of Premium” benefit; this means that the company will refund the beneficiary with all of his or her premiums if they are still alive at the end of the insurance term. This is sort of like putting the money in a bank and receiving insurance coverage instead of interest. However, the effect of inflation upon these premiums should not be overlooked, especially when the term lasts 2-3 decades.

Overall, mortgage protection coverage is worth considering for people who still have a significant amount of principal to pay off, along with monthly payments which are high enough that they would be burdensome for a spouse to continue paying. It can be quite affordable for some people or too expensive for others, depending upon various factors.

If you are considering buying a home there are tons of websites and mortgage tools offering you advice. While each person has a different situation due to their perspective and experience in home buying some general dos and don’ts apply to everyone looking to buy a home.

First, you should definitely protect your credit by making your debt payments, such as loans and credit cards, on time. Each of these payments go into your credit score a lender looks at which, in turn, determines how good of a loan you get or if you get one at all. If you do have to miss a payment miss the credit card first because credit-scoring systems look at the performance of similar loans first when deciding what type of score to assign.

Secondly, think about the benefit of paying off your consumer debt, even if it means a smaller down payment. The reasoning behind this is you’ll have a higher mortgage payment at lower interest rates, rather than high-interest rate credit cards to pay in addition to your mortgage. However, if you don’t have a lot of debt do save as much as possible to increase your down payment. If you can, set up a monthly direct deposit into an account to save the money for your down payment.

Don’t make any big purchases in the months leading up to your mortgage inquiry. Besides the obvious fact that it makes less money available for the down payment, it might require you to get another loan, which won’t look good to either the mortgage lender’s credit scoring systems or the human underwriter.

Make sure you can afford the loan you want. If the new mortgage payment is going to stretch your budget too much then rethink it. Generally real estate agents will show you houses that are at the maximum of what you can afford. Even though you may be tempted consider how much of your living expenses will suffer with a larger mortgage.

Finally, do get pre-approved for your mortgage and not just pre-qualified. There is a big difference between the two and the pre-approval is much closer to obtaining a loan and locking in a rate and term.

Using a mortgage calculator can offer several benefits when deciding which type of loan is best. This makes it easier to evaluate whether or not a mortgage has the right combination of long-term financial benefits and affordable monthly payments. Read on to learn more about the benefits of using a mortgage calculator.

Any mortgage calculator will indicate the monthly payment amount on a loan. Some also show the total cost of the loan during its entire term; if not, you can multiply the monthly expense by twelve and multiply that amount by the number of years. The calculator might also have options for bi-weekly or bi-monthly payments. Keep in mind that these calculations will not reflect any interest rate changes, nor the cost of Private Mortgage Insurance (PMI) if it applies. Borrowers who itemize tax deductions should also take into account the deduction for part of their interest payments.

Knowing the overall cost of mortgages benefits borrowers because it becomes easier to understand the long-term impact of a higher or lower monthly payment. For example, a forty year mortgage might cost $70 less per month than an equivalent thirty year loan, but have an overall expense of $80,200 more. The forty year term is preferable for people with lower income levels, while the thirty year option benefits anyone who can afford it in the long-run. Borrowers can also see the effect of slightly different interest rates; a quarter percent higher rate on a $135,000 thirty year loan would cost about $22/month more and $7,850 overall.

The formula to calculate monthly payments is fairly complex; trying to find it with a basic four-function calculator would be very difficult. Some people estimate the monthly payment using a simple formula like “interest x principal / 12″; this often produces an answer that is inaccurate by $100-250 dollars on thirty year mortgages, although it is relatively accurate for a forty year loan. For use when a computer is not present, handheld mortgage calculator units are available for as little as fifteen dollars.

Basically, a mortgage calculator benefits the borrower by better informing him or her of a specific loan’s monthly and overall costs. The borrower can more conveniently compare the short- and long-term benefits of one loan to another, without relying upon an approximate formula. Using such calculators for other types of borrowing is also possible, including auto loans.

The U.S. housing and mortgage industry has faced many difficulties in the past couple years, with widespread foreclosures occurring, home sales down, and lenders having to be “bailed out” by the government. Voter concern about the economy has become one of the most important issues in this election. So what do the 2008 presidential candidates plan to do about housing? Here are some details about each of the candidates housing plans, at a glance.

Barack Obama: The presidential nominee of the Democratic Party, Senator Barack Obama plans to take various measures aimed at assisting homeowners and regulating the housing industry. He calls for instituting a mortgage tax credit to benefit owners who don’t itemize their deductions, creating a scoring system that makes it less difficult to compare mortgage offerings, and initiating a program to encourage the conversion of present mortgages to fixed-rate thirty year loans. Senator Obama also supports additional efforts to detect and punish those guilty of mortgage fraud.

John McCain: Senator and Republican presidential nominee John McCain also plans to introduce a program that would help subprime loan holders change to fixed rate 30-year mortgages. He calls for some limitations on federal bailouts, but supports aiding banks if it is necessary to avoid “systemic risk”. McCain plans to help housing related non-profits which work to assist homeowners. Part of a speech by Senator McCain in March urged lenders to “do everything possible” to help the economy and prevent people from losing their homes. He opposes mortgages involving little or no downpayment.

Other Candidates: Libertarian presidential candidate and former Congressman Bob Barr has criticized the bailout for Freddie Mac, Fannie Mae, subprime mortgage holders, and others in the housing industry. He accuses Congress, President Bush, former President Clinton, and the Federal Reserve of helping to bring about the subprime crisis. Independent candidate Ralph Nader calls for greater regulation of trading in derivatives (investors have bought derivatives of mortgage revenues from Freddie Mac and others) and he supports the increased building of energy efficient housing and infrastructure.

Basically, the Republican and Democratic presidential candidates housing plans both support the bailout, along with efforts to penalize mortgage fraud and convert subprime mortgages to 30-year fixed rate loans. However, Obama puts somewhat more emphasis on government assistance to homeowners. Each of the candidates plans to support additional regulation and/or government intervention, with the exception of Bob Barr, who opposes govt. involvement in the economy.