US 30-year mortgage rates lowest since May-Freddie

(Adds quotes, housing starts, background, byline)

By Lynn Adler

NEW YORK, Sept 17 (Reuters) - The 30-year U.S. home loan rate has dipped to a 3-1/2-month low to flirt again with breaking below the psychologically important 5 percent level.

Average 30-year mortgages, the most widely used loan product, declined 0.03 percentage point to 5.04 percent in the week ended Sept. 17, Freddie Mac said on Thursday.

The rate was the lowest since 4.91 percent in the week to May 28 and about 7/8 percentage point below the 5.78 percent a year ago, according to Freddie Mac, the second-largest U.S. home funding company. For more rates click on [ID:nWEQ001394].

"Interest rates for 30-year fixed-rate mortgages have averaged just above 5 percent through mid-September, which is roughly a percentage point below last year's average and suggests that 2009 may reach a record annual low since the survey began in 1971," said Freddie Mac chief economist Frank Nothaft in a statement.

The rate averaged 6.03 percent with lenders charging 0.6 point in fees last year, 6.34 percent with 0.4 point in fees in 2007 and 6.41 percent with 0.5 point in fees in 2006, according to Freddie Mac.

Government intervention has driven down housing borrowing costs this year. The Federal Reserve -- the U.S. central bank -- is buying up to $1.45 trillion of mortgage-related securities in programs set to finish at year-end.

When mortgage rates hits their lows in the spring, applications to buy homes were as much as twice current levels, based on Mortgage Bankers Association weekly figures. Requests for loans to refinance were at least double.

It could take a push through those record low mortgage rates, as well as renewed confidence about employment, to fuel a repeat wave of such heavy purchase and refinance applications, economists said.

Market strategists widely expect the Fed to extend the time for these purchases into 2010 to ease the markets into its absence as a major buyer.

"The Fed will want to keep rates low long enough, they want to keep the mortgage market functioning," said John Canally, economist at LPL Financial in Boston.

"They don't want to pull the rug out from under the recovery, it's only one quarter old," he said. "We've had 14 consecutive quarters of negative contribution to GDP from housing, and they don't want to get one positive quarter and then have it go back in the tank."

In the latest sign that consumers are responding to low mortgage rates as well as the soon expiring first-time home buyers tax credit, housing starts and building permits rose in August to nine-month highs. [ID:nN16145484]

Mortgage lenders in the past week charged an average 0.07 point in fees on 30-year loans, unchanged in the week. (Editing by James Dalgleish)