Mortgage rates fall with CPI report

At long last, lower rates. Mortgage rates fell for the first time in five weeks.

The benchmark 30-year fixed-rate mortgage fell 2 basis points, to 6.29 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.27 discount and origination points. One year ago, the mortgage index was 6.57 percent; four weeks ago, it was 6.19 percent.

The 15-year fixed-rate mortgage fell 2 basis points, to 6.02 percent. The 5/1 adjustable-rate mortgage fell 6 basis points, to 6.11 percent.

Almost half of mortgage applicants are refinancing their home loans, and the percentage of people opting for adjustables continues to tumble. Only 18.1 percent of applicants asked for ARMs last week, according to the Mortgage Bankers Association. The ARM share hasn't been that low since the summer of 2003, when a 30-year fixed could be had for less than 6 percent.

Why shun ARMs now?

It's unclear exactly why adjustables have become less popular in comparison with fixed-rate loans.

The most popular adjustable is the 5/1 ARM, in which the initial rate lasts five years before the rate is adjusted annually. True, the initial rate on the typical 5/1 is barely an eighth of a point lower than the 30-year rate in Bankrate's survey. A lot of borrowers just figure that they'll pay the slightly higher rate for the 30-year fixed and not have to worry about rate increases. But the difference between the 5/1 ARM and the 30-year fixed has been less than 20 basis points all year.

One possible reason for the sudden deflation in the popularity of ARMs might have to do with the meltdown in the subprime market. There has been a lot of talk about subprime ARMs and how they have contributed to the debacle, as homeowners find that they can't afford their monthly payments after rate reset. That might be making borrowers shy away from ARMs in general.

For most borrowers, the "default" mortgage should be a 30-year fixed, and they shouldn't get another type of loan unless there are good reasons. And there is a situation in which an adjustable is a good option: when the borrower is certain to sell the house within a few years. A good candidate for a 5/1 ARM is someone who buys a starter house with the intention of moving up in three to five years. Even so, such a buyer risks a drop in the home's value, making it difficult to sell at the desired time.

The economic event that sent rates lower this week was a surprisingly tame report on inflation in March. The Consumer Price Index registered a rise in core prices of just 0.1 percent, when many economists were expecting an increase of twice that. The lower-than-expected kept a lid on bond yields, which translated into slightly lower mortgage rates.