Early Christmas for Mortgage Borrowers

There's some good news on the mortgage front for a change. Despite all indications to the contrary, mortgage lending has not come to a grinding halt. In fact, for those who have good credit and qualify for standard fixed-rate loans, mortgages have actually gotten more affordable.

The credit crunch has definitely made it harder for many people to get a mortgage. The subprime soap opera has continued to hurt lenders, most recently forcing Washington Mutual (NYSE: WM) to cut its dividend. Falling home prices have homebuilder Toll Brothers (NYSE: TOL) reporting its first quarterly loss in two decades. And executives at D.R. Horton (NYSE: DHI) and Centex (NYSE: CTX) still can't find a bottom in the housing market.

Haves and have-nots
But while some borrowers are getting shut out of the mortgage arena, others have an opportunity to reap rewards. For those stuck in subprime, lenders such as Wells Fargo (NYSE: WFC) and H&R Block (NYSE: HRB) have closed their doors. But according to Bankrate, rates on 30-year fixed mortgages -- which used to be standard fare for the vast majority of borrowers -- fell as much as 0.8% since the beginning of the summer before bouncing back a bit in recent weeks.

Now, that may not seem like a lot, but lower rates have a huge impact on how much you pay for a mortgage. When you consider that the typical 30-year mortgage costs you more in total interest than you repay in principal, even small rate differences add up. The chart below shows what happens when you combine these falling rates with lower home prices.

	Home price	Loan amount	Rate	Monthly payment
Before	$250,000	$200,000	6.375%	$1,248
After	$240,000	$192,000	5.75%	$1,120

Source: Fool calculator. Assumes 4% home price drop and 5/8% drop in mortgage rate.

As you can see, homeowners are starting to see some real savings. This 10% reduction in monthly costs can make the difference for people who are right on the margin of being able to afford a home. And in some areas, greater price declines have pushed even more buyers into contention for homeownership.

Rate moves and the Fed
A lot of this has to do with the Federal Reserve's balancing act between encouraging economic growth and keeping inflation under control. Low short-term rates have not only helped bond investors, but could also dampen mortgage resets on adjustable-rate mortgages. At the same time, although the Fed was widely criticized yesterday for not moving faster to boost the sagging economy, its conservative approach has kept long-term rates low as well, which in turn has helped fixed-rate mortgage borrowers.

Depending on whether you already own a home, there are a couple of ways you can take advantage of these favorable conditions:

• Shop wisely. If you've been in the market to buy a home for a while, you may have set a price range based on higher rates. Have your lender or mortgage broker run the numbers again, this time using the lower rates that are now available. You might see your affordable range rise by $10,000 to $20,000 or even more.
• Consider refinancing. Low rates are exactly what people who took out low-rate ARMs should have hoped for. While a fixed mortgage may cost more, it's still a better bet for many than waiting for an adjustable mortgage to reset at a much higher rate. And even if you already have a fixed mortgage, it's worth a look to see how much locking in a lower rate could save you in the years to come.

So while many homeowners will wait anxiously to see whether they'll be eligible for the new mortgage bailout plan, prime borrowers may have a chance to cut their housing costs substantially. But rates can move quickly, so don't wait until after the holidays to see if you've got an early Christmas present coming.