Due to the falling mortgage rates, now might be the best time to purchase a home if you qualify for a loan.

According to The Wall Street Journal, mortgage rates fell again last week, marking the third week of declining rates in a row. In addition to dropping for three consecutive weeks, this new decline also marks the first time in awhile that mortgage rates drop below five percent. Currently, the rates are at 4.99 percent for the week that ended on Thursday, January 21.

The week before, the average rate for a 30-year fixed rate mortgage stood at about 5.06 percent, which is a drop from a year ago when the average rates stood at about 5.12 percent. Mortgage rates for 15-year fixed rate mortgages are even lower than that. The current rates as of last week are 4.4 percent which is a drop from 4.45 percent from the previous week and 4.8 percent from last year.

Mortgage rates for adjustable-rate mortgages are also down. As of the end of last week, rates stand at about 4.27 percent. The previous week, the rates were 4.32 percent which is nearly a one percent drop from last year's 5.24 percent.

Those in the mortgage industry are hoping that the lower interest rates will lead to a boost in home sales. With a flailing housing market, lower mortgage rates may just be one of the signs of a revival in the mortgage industry and in the economy as a whole. When money is cheaper to borrow, people are more likely to borrow it. In the last week alone, the mortgage industry saw a nine percent increase in mortgage applications. This could just be wishful thinking but it could also mean the start of something that could have a snowball effect and help our economy.

According to Daniel Penrod, a senior analyst at the California Credit Union League in Ontario, California, the lowered rates are what is "really keeping the mortgage industry afloat right now." The majority of the people who are applying for those new mortgages last week were first-time homebuyers who have been waiting for the mortgage rates to drop so they can take advantage of them. As a result, most of the demand is in the lower-end homes.

The increase in mortgage applications is also a signal that consumers may be slowly increasing their confidence in the economy overall. In addition to that, many current homeowners are applying to refinance their homes as the high unemployment rate has managed to keep many potential home buyers away from trying to purchase a home.

The good news is that you still have time to claim that tax credit while taking advantage of these low mortgage rates. The federal government is offering an $8,000 tax credit to first-time home buyers and a $6,500 credit to experienced home buyers who purchase new homes before the end of April. With all of this going on, it would surely be a great time to apply for a mortgage loan while rates are low and tax credits are high.

After a rising surge from September through November, existing-home sales fell as expected in December after first-time buyers rushed to complete sales before the original November deadline for the tax credit. However, prices rose from December 2008 and annual sales improved in 2009, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million units in December from 6.54 million in November, but remain 15.0 percent above the 4.74 million-unit level in December 2008.

For all of 2009 there were 5,156,000 existing-home sales, which was 4.9 percent higher than the 4,913,000 transactions recorded in 2008; it was the first annual sales gain since 2005.

The national median existing-home price³ for all housing types was $178,300 in December, which is 1.5 percent higher than December 2008. “The median price rose because of an increased number of mid- to upper-priced homes in the sales mix,” Yun said. It was the first year-over-year gain in median price since August 2007.

So, what are we to make of these numbers? It's clear that the home-buyer tax credit fueled a lot of sales in November. Now that the credit has been renewed until April 2010, there is less urgency and sales numbers are falling. It shows the impact the government program is having on monthly sales figures.

Still, a 16.7% drop is significant. Total housing inventory at the end of December fell 6.6 percent to 3.29 million existing homes available for sale, which represents a 7.2-month supply at the current sales pace, up from a 6.5-month supply in November. It's not good that inventory is headed in the wrong direction. If this is a housing recovery, it's a very tentative one.

I have a discussion with a friend of mine on whether it is better to buy a house when interest rates are low, as they are today, or high. I think the recent real estate collapse provides the answer.

The conventional wisdom is that the best time to purchase a house or real estate is when rates are low. We've all heard the saying, "when rates are low you can afford more house." And this is true. When rates are low, buyers can afford more because monthly payments are lower. But the reality is, everyone can afford to pay more and as a result home prices rise for everyone. During the most recent real estate bubble, rock bottom interest rates and lax lending standards combined to create a sellers market. Money was cheap. As a result, home prices soared.

Now, let's look at purchasing a house in a high interest environment. When rates are high, home prices are lower. Like a bond, home prices move inversely to interest rates. So while you may pay a higher rate, you're able to buy the same home because prices are lower.

So is it a wash? Not really. That's because if you purchase a home in a high interest rate environment, you can always refinance your mortgage at some later point when mortgage rates fall. And they will fall at some point because mortgages, like anything else, are cyclical. But if you purchase a home in a low interest environment and mortgage rates rise, then the value of your home drops, your equity disappears and depending on how much equity you have in the house you might be underwater.

The low interest rate scenario is exactly what has happened to millions of people across the country. They purchased a home during the low rate, easy money era between 2001-2005. As banks began to tighten in 2006 and rates began to inch up, the real estate market collapsed. Now, the Fed is trying to reinvigorate real estate by driving rates down again. But because banks are not lending and consumers are worried about jobs, no matter how low rates go they won't be low enough to prop up home prices.

If you're thinking of buying a home in this low-rate environment be careful. Because you most likely will never be able to profitably refinance and chances are, your home's value will go down if mortgage rates go up.

The average rate on a 30-year fixed mortgage dropped from 5.06% to 4.99% according to data from Freddie Mac. This is consistent with data from the BestCashCow rate tables which show average 30-year mortgage rates moving from 5.122% to 5.075%. Rates seem to vacillating at the 5% mark as the market waits to see what the Fed is going to do with their mortgage backed security repurchase program. If they continue it, rates should stay low for awhile longer. If they begin to phase it out, as is expected, look for rates to continue creeping upward.

In their conference call with analysts, Wells Fargo execs expressed their believe that mortgage rates will go higher, and once the increases start, they could be swift.

Averages though aren't actual mortgages. I like to check and see what rate is actually available. Since I live in Massachusetts I checked Massachusetts mortgage rates. Below I compared the best rate I could find on a $200,000 mortgage with 0 points:

This Week Last Week

Rate: 4.750 4.875%

Points: 0 0

Fees: $1,594 $1,995

Both Advantage Mortgage and AimLoan.com offer a 4.750% 30-year fixed mortgage but the closing costs for Advanced Mortgage are only $1,594 versus $1,995 for AimLoan.com.

The 15-year FRM this week averaged 4.40 percent down from from last week when it averaged 4.45 percent. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.27 versus last week's 4.32 percent. The 1-year Treasury-indexed ARM dropped from bit from 4.39% to 4.32%.

"Fixed mortgage rates followed bond yields lower for the third consecutive week, pushing 30-year mortgages below 5 percent once more," said Frank Nothaft, Freddie Mac vice president and chief economist. "Similarly, ARM rates eased along with shorter-term rates, as the federal funds futures market indicates no increase in the Federal Reserve's target rate following its upcoming committee meeting on January 26th and 27th.

Use the BestCashCow rate tables to find the best mortgage rates in your area.

With credit cards, student loans and medical bills plaguing many American consumers today, a huge number of people have bad credit. Even the ones who are trying their best to pay off their debts have some work to do before improving their credit score. As such, it's difficult for many of them to get a mortgage because of their bad credit. It is more difficult to get a mortgage if your credit is bad, but it's not impossible. Following are some things you can do to still get a mortgage regardless of your credit score.

Gather your available cash. The best thing you can do when trying to get approved for a mortgage when you have bad credit is to gather a larger down payment. You may need to clean out some of your bank accounts in order to come up with a sizable cash payment, but it will likely be necessary if you have bad credit. Banks and lenders are much more likely to loan you money on a mortgage if you can put 20 or 25 percent down on the home because you become less of a risk when you do that.

Make your payments on time. A good portion of your credit history is based on how timely you make your payments. You can start improving your bad credit by making on-time payments for six months to a year. Once you do this, you can go back to the mortgage lender and see about getting a loan. Your credit score will have jumped by that time and you may even get better mortgage rates as a result.

Consider subprime lenders. Subprime lenders are more likely than traditional mortgage companies to loan money to borrowers with bad credit. However, some subprime lenders have a reputation for taking advantage of people by charging extra high interest rates. Most of the subprime lenders are out of business due to the tough financial times, but you still may be able to find a few still in business.

It is not impossible to get a mortgage when you have bad credit. Lenders do, however, consider you to be more of a risk when you have a history of late payments, defaulted loans or too much debt. By fixing these problems and making some changes in your spending habits, you can become a more attractive credit risk and realize your dream of buying your first home!

In its quarterly conference call, Wells Fargo stated that they expect interest rates to rise in the future and to rise at a potentially very fast pace. Below is a partial transcript from the conference call.

Bank Analyst: just a follow-up question on rates. I just wanted to understand, Howard (Wells Fargo CFO), how you are thinking about the impact of the Fed exit on the fixed-income market and how you are planning on managing the balance sheet for that?

Howard Atkins: Well, that is a good question, Betsy, and the Fed obviously is active in buying MBS. And despite the fact that the yield curve is as positively sloped as it is right now, their active purchases is a factor that is, in some senses, artificially keeping long MBS yields lower than they might otherwise be. At some point presumably, they will either gradually or more quickly reverse course and that could lead to an increase in mortgage interest rates. And as I mentioned a couple of times in my remarks, in possible preparation for that, we have been keeping our powder dry, in effect underinvesting this large base of core deposits that we have for the possibility that that reverses course.

Analyst: So you might get some OCI hit near term, but dry powder leads you to a better outlook for earnings, is that the way to think about it?

Atkins: Yes, again, while the mortgage business is showing good results right now, in effect, on the portfolio side, the investment portfolio, we, in effect, are giving up some current income. We don't believe in the carry trade and we do want to preserve some powder in case rates do go up and we'll have the powder at that point, we will invest the powder at that point to offset some -- whatever is going on in the mortgage business.

John Stumpf, Wells CEO: I see this as the classic short-term view of the business and long-term view of the business. 400 basis points or something like that, which you make in the carry trade today is very attractive. But we think it is the wrong decision long term because we think the bias is for higher rates, not for lower rates and we are willing to wait for that to happen. We think that is the better trade.

Atkins: we are effectively giving up 400 basis points today for possibly a year or so, maybe plus or minus, to avoid the potential risk of a larger number of basis points for 30 years. So the last thing we want to do is get stuck with securities at these low levels of interest rates.

Stumpf: Because I think when rates move, they are probably going to move at some speed and I don't think it's going to be maybe a quarter. It could be more than that and it could happen relatively quickly.

Atkins: this is the same thing that we did back in 2002, 2003 when interest rates were also at cyclical low points just before they went up a lot. What we are doing now is not very different from the way the Company has always managed itself.

So, let's translate this to English. Wells Fargo is not investing in the carry trade that is making so many banks so much money right now. The way the carry trade works, is that the banks borrow money at the Fed for virtually 0%, or even from their depositors at virtually 0%, and then invest this money in MBSs, which pay 4.5%. This difference in yield - almost 4.5% - if profit for the bank. The carry trade works as long as easy, cheap short term financing is available, and long-term interest rates do not rise. If short term rate spike along with long term rates, then banks cannot roll over their funding to finance the MBS purchases. At the same time, the value of the MBS they hold will drop in value.

What Wells means by keeping its powder dry is that it doesn't want to play that game. It expects rates to rise and the carry trade to come to an end. Instead, it is waiting for mortgage and other loan rates to go up and will then invest at those higher rates (i.e. make more loans). Atkins says this explicitly in the call: [Wells approach is] "to invest when long-term yields are high, not when the carry trade looks good. In effect, we are currently giving up current income, to preserve the flexibility to add to the portfolio at higher rates for even more income going forward."

Taking advantage of low mortgage rates attracts many first-time home buyers to the real estate market. However, you may forget some aspects of home ownership in your rush to jump into the market. One of the essential aspects of buying a new home is the mortgage insurance. Unfortunately, many inexperienced home buyers are not familiar with the two main types of mortgage insurance or the type that they need. Private mortgage insurance is ideal for some home buyers while Mortgage Life Insurance may be better suited for a different type of homeowner. Following is a brief description of each type of mortgage insurance and they mean to you.

Mortgage Life Insurance
Mortgage life insurance is a type of insurance that is available to home buyers if they want their mortgage paid off in the event that the person making the payments suffers a debilitating injury, incapacitating disease or death. At first, buying this type of mortgage insurance may seem helpful. However, these incidents occur so rarely that it may not be the best option for your financial needs. This type of policy may come in handy, however, if you are already in poor health because your premiums on a mortgage insurance policy are typically much lower than on a normal life insurance policy.

Private Mortgage Insurance
This type of insurance is more suited for the lender's protection. However, it may be required if you are buying a house and you cannot put a down payment of at least 20 percent. If you default on your mortgage and the lender is unable to sell your home for the amount of money needed to pay it off, your private mortgage insurance policy comes into effect.

A private mortgage insurance policy premium is based on the value of your loan. It is usually about one-half of one percent of the total money that you borrow. For instance, if you finance a home that costs $150,000 and you put a 10 percent down payment towards the price, you would finance $135,000. Your private mortgage insurance (or PMI) annual payments would be about $675.00. That comes out to about $56.25 per month. Fortunately, once you have paid down your mortgage to less than 80 percent of the home's original market value, you can usually cancel the PMI and save that money.

If you want to cancel your PMI, you must call the lender and ask to cancel it. They will not do it unless you ask. There may be some rare cases in which you are not allowed to cancel, too. You can get more information about the reasons by speaking with your realtor or your lender.

Although both of these mortgage insurance policies protect different parties, they are both designed to protect an investment. With PMI, the mortgage company offers it to protect the money they have invested by loaning to you. With mortgage life insurance, you can feel better knowing that your mortgage is taken care of in case you die or suffer some other major catastrophe. You never know what's going to happen in life and taking a few simple precautions can help you prepare for those bad events.