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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 26, 2013

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Home loan interest rates dropped lower this week and increased competition for buyers according to rate reports and interviews provided by

Interest rates have drastically declined for the past two weeks since the Fed announced that they would not start to reduce their bond purchase program. Last week the initial shock from this inaction sent the home loan interest rates down. This week, the rates continued their decline.

For the week ending Sept. 26, 2013, the 30-year fixed-rate mortgage averaged 4.11 percent. This was a decrease from 4.31 percent reported last week.

Although the rates are higher than historic lows, they have calmed significantly in the past month. Rate reports on Aug. 22, 2013, merely one month ago, showed the 30-year rate at 4.55 percent. The recent interest rate reduction could save borrowers thousands of dollars over the course of an average mortgage loan term of 30 years.

If a borrower took out a $250,000 mortgage at today’s average 30-year rate of 4.11 percent, his or her monthly payment would be $1,209.45. After 30 years, the borrower would pay a total of $435,402 in combined mortgage and interest costs.

If the same borrower took out a 30-year loan one month ago, when rates averaged 4.55 percent, he or she would pay $1,274.15 a month for a total repayment cost of $458,694. Taking out a loan today in comparison to one month ago would save a borrower $23,292.

The second home loan interest rate change reported this week is the 15-year FRM. It averaged 3.15 percent, another large decrease from 3.31 percent set last week.

Finally, the 5/1 adjustable-rate mortgage shifted downwards from 3.03 percent last week to 2.91 percent this week.

Gus Altuzarra, CEO of Vertical Capital Markets Group, said that the rates have moved substantially in a short period of time because the 10-year treasury index has been “extremely volatile.”

“The rates are heading in a direction that they need to if the government wants to keep the housing movement in the right direction,” he said.

Despite the decline after the Fed announcement, Altuzarra predicts that interest rates will not likely drop more than 10 basis points.

“I don’t think we are going to see a big continual drop because everybody knows that tapering is going to come,” he said. “It will be interesting to see what data is going to come out about the housing market in October.”

The quick and drastic changes to the housing market are positive for some buyers and harmful for others according to Allan Glass, president of ASG Real Estate.

He said there are three types of buyers in the housing market: cash buyers, buyers with large down payments and buyers with small down payments that utilize FHA products. This third group is most affected by the home loan interest rate changes.

Since the start of 2013, these three groups have fought for similar purchases, leaving those at the bottom, the FHA dependent buyers, out of luck.

“The groups that are being harmed the most need the most leverage,” Glass said.

Lower rates have increased the competition for all three groups of buyers, but it affected the bottom the most. Cash-only buyers are able to finalize a deal quickly whereas FHA-backed loans must be approved and borrowers could be rejected and lose their chance at the property.

The competition stimulates the housing recovery, but Glass said it “makes things difficult for buyers that are stretching every last dollar and barely qualifying to purchase.”

Altuzarra believes that despite the competition, there are still potential buyers that are waiting for a better lure to purchase a home. He said society is addicted to low interest rates.

“How do you wean people off it without bringing the housing market to a halt?” he questioned.

One cause is tight and unsensible underwriting regulations. He said that underwriting needs to be adjusted so that people are able to qualify for more loans because right now, consumers are “hamstringed by regulations.”

“If we stall this housing market, this economic recovery is going to take a lot longer,” Altuzarra said.