Home loans cost less this August despite the Fed

White house on top of money

A funny thing's happened to mortgage rates this year.

They've gone down.

Every expert we spoke with said mortgage rates had nowhere to go but up in 2014.

We started the year with the average 30-year fixed-rate mortgage — the most popular way to finance a home — costing 4.69%.

The consensus among economists and industry analysts was that it would rise to 5.5% by the end of the year.

So what's happened? The average price of a 30-year fixed-rate home loan dipped as low as 4.25% in May and is just 4.31% in our most recent weekly survey of major lenders.

To everyone's surprise, we're enjoying lower mortgage rates than we did last summer.

The typical 30-year fixed-rate home loan costs about one-third of a point less, a decrease that will save borrowers about $21 a month for every $100,000 they borrow.

And that's just looking at the average cost of financing a home.

Savvy borrowers with decent credit can almost always pay a quarter to half point less than that.

Spend a few minutes searching our extensive data base for the best current mortgage rates from dozens of lenders in your area. You'll see what we mean.

National Average Mortgage Rates

Type of loan Current average Record-low average Established
30-year fixed rate 4.29% 3.50% Dec. 5, 2012
15-year fixed rate 3.40% 2.75% May 1, 2013
30-year fixed jumbo 4.39% 3.93% May 1, 2013
5/1 ARM 3.34% 2.63% May 1, 2013

Why did everyone think mortgage rates were going to go up this year?

The Federal Reserve is ending its campaign to drive down long-term interest rates, including mortgage rates.

The nation's bank-for-banks began buying $85 billion worth of debt a month in September 2012, a fairly even split between Treasury bills and bonds backed by thousands of home loans.

By flooding the mortgage market with money, it pushed mortgage rates to record lows in an attempt to boost real estate sales and property values.

In a process the Fed refers to as tapering, it reduced those purchases to $75 billion in January, $65 billion in February and March, $55 billion in April, $45 billion in May, $35 billion in June and July, and a projected $25 billion in August and September.

Minutes from a recent Fed policy meeting say it's planning to buy a final $15 billion in October and then bow out of the bond market in November — unless we're confronted with some new economic catastrophe.

So why are mortgage rates defying all expectations?

One reason is the weak demand for new loans.

Millions of homeowners leapt at cheaper mortgages when interest rates were falling. Many refinanced twice. Some replaced their loans three times.

That boom is over.

The Mortgage Bankers Association expected refinancings to fall by more than half this year, but they're actually off by more than 60%.

The association expected some of those losses to be offset by a 10% rise in home sales and corresponding increase in demand for mortgages to finance those purchases.

But home sales are flat, and it now expects the number of mortgage originations for purchases to fall by about 10% this year.

As a result, lenders wrote a total of 226,000 mortgages for one- to four-family dwellings during the first quarter, the fewest since the second quarter of 1997.

Although the market rebounded to 267,000 loans in the second quarter, that was still less than half the number written in April, May and June of 2013.

Yet there's still a lot of money willing to buy whatever debt mortgage lenders can create, even with the Fed bowing out as buyer.

Although the Royal Bank of Scotland estimates there's a global market for $1.2 trillion in new high-quality debt this year, it says only half that much will be created and sold.

(In case you're wondering, the declining federal deficit also means fewer government bonds. A new research paper from Deutsche Bank estimates that the net issuance of Treasury debt is down 59% through May.)

The promising bottom line for borrowers: Crashing demand and lots of money to lend from sources other than the Fed have eased any pressure on interest rates. At least so far.

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Not only are home loans cheaper, they're also easier to get.

Home buyers with conventional loans closing this year have an average FICO credit score of 755, according to Ellie Mae Inc., a California-based mortgage technology firm whose software is used by many lenders.

That's down from an average of 759 in 2013 and 763 in 2012.

The average FICO score for homeowners who refinanced through a conventional loan was 733 in June, down a whopping 22 points from last summer.

FHA loans clearly helped borrowers with too much debt and lower credit scores.

The average FICO score for purchases dropped from an average of 700 in 2012 to 695 in 2013 and just 683 in June.

It's also taking less time for loan applications to be processed and approved — an average of 41 days. That's down from 46 days last year and 48 days in 2012.

Those are exactly the kinds of trends that help borrowers land the loans they need.

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