Adjustable Rate Mortgage Benefits Are Improving

April 16, 2010 By Leave a Comment

Comparing the 30-year fixed to the 5-year ARM Apr 2009-Apr 2010

Each week, government-led Freddie Mac publishes a weekly mortgage rate survey based on data from 125 banks across the country.  According to this week’s results, the relative rate of a 5-year ARM in Arizona is extremely low versus its 30-year fixed-rate cousin.

Consider this comparison:

  • In April 2009, the two products ran neck-and-neck with respect to rates
  • In April 2010, the two products are split by 0.99 percent

On a $200,000 home loan, that’s a difference of $117 per month to a mortgage payment.

Adjustable-rate mortgages aren’t suitable for everyone, but they can be a terrific fit given your individual circumstance.  For example, any one of the following scenarios could warrant a 5-year ARM:

  1. Buying a home with an intent to sell within 5 years
  2. Currently financed with a 30-year fixed mortgage with plans to sell within 5 years
  3. Interested in low payments and comfortable with longer-term interest rate and payment uncertainty

Additionally, homeowners with existing ARMs may want to refinance into a brand-new ARM, if only to extend the initial change date on the current note.

Before opting an ARM or a fixed, speak with your loan officer about how adjustable-rate mortgages work, and what longer-term risks may exist.  The savings may be tempting, but there’s more to consider than just the payment.

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Rising Inflation Has Negative Impact On Mortgage Rates

March 19, 2010 By Leave a Comment

Inflation is bad for mortgage ratesHomes are more affordable in Mesa, Arizona and across the nation as the housing market emerges from a slow winter season with mortgage rates still near 5 percent.

Soft housing and low rates are an excellent combination for home buyers but whereas home values rise with a gradual pace, mortgage rates change in an instant.  It’s something worth watching.

Each 0.25% increase to conventional or FHA rates adds approximately $16 per month for each $100,000 borrowed. Mortgage rate volatility can change your household budget.

If you’re trying to gauge whether rates will be rising or falling, one keyword for which to listen is “inflation”. Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that goods are more expensive, per se. It’s that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices.

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Mesa home may be as good as it gets.

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The Federal Reserve Statement Explained For March 16, 2010

March 16, 2010 By Leave a Comment

Putting the FOMC statement in plain EnglishToday, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged, in its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that the U.S. economy “has continued to strengthen” and that the jobs markets “is stabilizing”.  It also said that business spending has “has risen significantly”.

This is a slight departure from the Fed’s January statement in which housing was not mentioned and business spending was said to be “picking up”.

It’s also the sixth straight statement from the FOMC in which the Fed described the economy with optimism.  This is a signal to markets that 2008-2009 recession is over and that economic growth is returning.

The economy is not without threats, however, and the Fed identified several:

  1. High unemployment threatens consumer spending
  2. Housing starts are at a “depressed level”
  3. Consumer credit remains tight

The message’s overall tone, however, remained positive and inflation is within tolerance limits

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to end its $1.25 trillion commitment to the mortgage market by March 31, 2010. Fed insiders estimate that the bond-buying program lowered mortgage rates by 1 percent since its start.

Mortgage market reaction to the Fed press release is, in general, ambivalent. Mortgage rates in Gilbert are unchanged this afternoon.

The FOMC’s next scheduled meeting is a 2-day affair, April 27-28, 2010.

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