Mortgage rates drop back toward all-time lows in June

House on rate chart

After peaking in April, mortgage rates are falling again, and one type of home loan reached a new record low this month.

The average cost of a 30-year, fixed-rate loan fell below 4.7% in June.

That’s the cheapest it’s been all year, the cheapest it has ever been in June and just a quarter-point more than the all-time low reached in November 2010.

Atlanta has the cheapest home loans of the 13 cities we track, with an average interest rate of 4.46%. Boston has the highest average rate, but it's just 4.81%.

You can see how this has affected mortgage rates in your area by searching our extensive database of home loans.

Lenders are offering 30-year, fixed-rate loans for as little as 4.375%, or even 4.25%, with no points and application fees of less than $2,000 in most markets.

The principal and interest payments would be just under $500 a month for every $100,000 borrowed.

Our mortgage calculator can show you the payment for any fixed-rate loan.

Of course, you can get a lower interest rate – and lower payments – by choosing an adjustable-rate loan.

The average introductory rate for a five-year ARM has dropped below 3.4% this month, which is a record low for these types of loans. They averaged 3.64% in November 2010.

That could reduce the cost of your payments over the first five years to $440 a month for every $100,000 borrowed, which is about $75 less than with the average 30-year, fixed-rate loan.

Our adjustable-rate mortgage calculator can help you see how much you can save.

We know many borrowers don't want to even consider an adjustable-rate mortgage because so many homeowners defaulted on the irresponsible, unaffordable ARMs lenders were peddling during the housing boom.

According to a New York Federal Reserve report, ARMs accounted for 70% of all home loans in 1994. So far this year, they are less than 5% of the market.

But we think an increasing number of borrowers will opt for adjustable-rate loans this year as the difference in cost between ARMs and fixed-rate loans widens.

Lee Miller, a mortgage expert in Waimea, Hawaii, says, "ARM loans got a bad rap when (traditional) ARMs got confused with their less favorable cousins in the nonprime market.

"ARMs are still a reasonable choice for a select population."

How do you know if an ARM is right for you?

If you plan on moving in less than five years, then a five-year ARM can be a money-saving alternative.

The interest rates on seven-year ARMs have fallen as well, and they’re almost as cheap as 5/1 ARMs now. So, if having your rate locked in for another couple of years makes you feel more comfortable, go for it.

You just need to choose an ARM with reasonable terms so that you don't have to worry about making the payments, even if your plans change and you have to go through a reset or two.

That means a loan that resets no more than once a year and has the strictest limits on how quickly your interest rate can go up.

Look for an ARM with limits of 2/2/6, which means your rate can't go up more than two percentage points the first time it resets, or more than two percentage points any other time it resets, for a total of no more than six percentage points.

Walk away if a lender starts pushing exotic loans such as interest-only or option ARMs. These are the kind of adjustable-rate loans that resulted in rapidly rising payments and got most borrowers in trouble.

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