The average rate was 4.98 percent, compared to 6.2 percent of last year.
Even though many experts and analysts believe that 5 percent is just a psychological level, the rate drop will enhance the home loan demand, leading to better economic outlook.
"Lower mortgage rates should help homeowners lower their monthly payments and feed the ongoing recovery in the housing market," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.
"Freddie Mac estimates that borrowers who refinanced their conventional loan during the third quarter reduced their interest rate by a median of 1.1 percentage points, which will save these borrowers an aggregate of $3 billion in mortgage payments over the next 12 months," he further said.
Encouragement by Federal Reserve
Last year, the Federal Reserve encouraged lower mortgage rates by undertaking to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion.
The bond purchases from Fannie Mae, Freddie Mac and Ginnie Mae allowed lenders to reduce rates on new loans and decrease mortgage rates.
This purchasing program will end next year in the first quarter, said the Federal Open Market Committee.
Lower mortgage rates attracts purchases
Sales for homes have risen tremendously for the eighth month since December 2006. According to Nothaft, residential construction by private entrepreneurs has jumped by 3.9 percent since July 2003.
"In the third quarter of this year, residential fixed investment added almost a full percentage point to economic growth," he said.
The Mortgage Bankers Association reported on Wednesday that mortgage applications have increased by 8.2 percent during the week ending Oct. 30 compared to the previous week.
Mortgage rates are linked to both Treasury and mortgage backed security (MBS) yields.
Leif Thomsen, CEO of Mortgage Master, Massachusetts, said, "Even this slight rise in rates will take away some of the refinancing action and will put some more pressures on people to make purchases while they can.”
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