Fixed mortgage rates fell to their lowest levels in 20 months this week, with the average on 30-year fixed-rate mortgages dropping to 3.63 percent, according to today's weekly rate report from Freddie Mac.

It's the lowest 30-year rates have been since late May 2013 and a full three-quarters of a percent below what 30-year mortgages were averaging one year ago this week. The average on 15-year fixed-rate mortgages also fell this week to its lowest point over the same 20-month stretch, dropping to an average of 2.93 percent.

Borrowers paid an average of 0.7 points on 30-year mortgages and 0.6 points on 15-year loans; it should be noted that loans priced without discount points will likely have rates that are somewhat higher.

Mortgage rates have been gradually softening in recent months, providing a boost in mortgage refinancing and creating opportunities for home buyers as well. Mortgage applications last week rose to their highest level since June 2013, according to figures released by the Mortgage Bankers Association, spurred by a 22 percent gain in refinancing last week, which came on top of a 60 percent jump the week before.

Applications for mortgages to purchase a home were up 5 percent last week compared to this time last year, according to the MBA.

Not expected to last

Freddie Mac expects the low rates to be a fairly short-term opportunity, projecting that 30-year mortgage rates will remain in the 4 percent range for the first half of the year, as investors seek the safety of U.S. Treasury bonds in response to financial uncertainty in foreign markets, but then move higher as the global economic picture stabilizes.

A key issue is also when the Federal Reserve might finally change its policy and begin raising interest rates, which would definitely cause mortgage rates to rise. However, until inflation begins to assert itself, it's likely that the Fed will continue its five-year-old policy of promoting low interest rates to stimulate the economy.

Boost to economy?

The low mortgage and other types of interest rates, combined with current low gas prices and rising employment, could give the U.S. economy a boost to start off the New Year, according to Freddie Mac projections.

"On balance there are a lot of positive opportunities in the U.S. economy at the start of the year, and the real question is whether or not households and businesses will be able to seize these opportunities and make the most of them," said Frank Nothaft, Freddie Mac chief economist. "The reprieve in interest rates and drop in gas prices should help to spur economic growth. Until rates start to rise later in the year, housing markets should respond positively and we anticipate increases in home sales and continued improvement in construction activity. With rates lower at the beginning of the year, we'll see higher than expected refinance volumes as well."

In response to the brightening outlook, Freddie Mac now expects home prices to rise by 3.5 percent in 2015, an upward revision of 0.5 percentage points over last month's prediction.

A new forecast from sibling agency Fannie Mae calls for a 5.8 percent increase in total home sales during 2015, fueled by both low mortgage rates but also a gradual relaxing of the lending standards that have blocked or discouraged many potential homebuyers since the end of the recession. That's expected to include a 19 percent jump in construction of new single-family homes in 2015, for a total of 765,000 units.

Increased economic activity is also expected to tighten the labor market, leading to wage growth. The report noted that the National Federation of Independent business is predicting that small businesses will raise wages this year to the highest level since 2006.

Higher wages and increased employment aren't the only things that are expected to give a boost to the housing market this year. Freddie Mac predicts the decision by it and sibling agency Fannie Mae to begin accepting down payments of as little as 3 percent on home purchases and refinancing, combined with the FHA's recent reduction of its upfront mortgage insurance premium by half a percentage point, will have a positive influence by making housing more affordable to first-time homebuyers, particularly as members of the Millennial generation form families and start making up a larger share of households.

Published on January 23, 2015