Selling Within 5 Years? Switch To An Adjustable-Rate Mortgage. Seriously.
Mortgage rates have been rising — sharply even — but not all rates are rising equally. As such, it’s an excellent time to look at 5-year ARMs.
November 3 : The “Bottom” For Mortgage Rates
In April 2010, mortgage rates started a marathon run. A downhill race, as it was.
Economic uncertainty — both domestic and global — helped crown the U.S. mortgage market King in an aggressive flight-to-quality among international investors. Over a 26-week span, demand for mortgage bonds outpaced supply, driving mortgage rates to outrageous levels.
It ended November 3, 2010. That morning, 30-year fixed rate mortgages priced at 4 percent, with 0 points.
Never in history had rates been that low.
Since November 3, however, it’s been a complete mortgage market unwind. It was November 3 on which the Federal Reserve announced a plan to inject the bond market with $600 billion and the plan was met with derision. Following the announcement, mortgage rates rose off their lows and never returned.
3 months later, we know — the Federal Reserve killed the Refi Boom.
Adjustable Mortgage Rates Aren’t Feeling The Pinch
According to Freddie Mac’s weekly mortgage rate survey, average 30-year fixed rates are up 0.625 percent since early-November. On the street, though, I’ll tell you the number’s higher. Closer to a full point, actually.
The 5-year ARM, by comparison, is up only modestly.
The 30-year fixed and the 5-year ARM are responding to today’s economy differently, creating the largest interest rate discount in recent history.
- Historical Interest Rate Discount : 0.42 percent
- Current Interest Rate Discount : 1.10 percent
ARMs are decidedly attractive as compared to 30-year fixed rate mortgages right now. A $300,000 mortgage financed by ARM saves $194 monthly over a comparable fixed-rate loan.
Furthermore, so long as the Fed keeps “printing money” via its bond buys, the spread between ARM and Fixed is expected to widen. This is because when the Fed creates new money and adds it to the existing money in circulation, all dollars are, therefore, worth less and this is the very definition of inflation.
Inflation is awful for mortgage rates.
Use Wall Street’s Anti-Inflation Attitude For Benefit
To understand why inflation is bad mortgage rates, think like a Wall Street buyer of mortgage-backed bonds.
Mortgage bonds make periodic interest payments to investors, and then a lump-sum principal payment at a specific point in the future. The payments are all made in U.S. dollars. If the dollar itself is expected to lose value because inflation over time, investors will insist on a higher rate of return to make sure they’re getting their money’s worth, so to speak.
And, as the time until payoff lengthens, that inflation risk increases. This is one reason why 30-year fixed mortgage rates tend to respond more drastically to inflation than comparable 15-year fixed mortgage rates. More can happen in 30 years than in 15.
The 5-year ARM, by comparison, is even less affected.
5-year ARMs often payoff in 5 years or fewer, but when they don’t, they’re subject to inflation-based adjustments. Banks, therefore, have significantly lower inflation risk on ARM products — both in the short- and the long-term.
Less risk, lower rates.
See For Yourself. Compare The 5-Year ARM To The 30-Year Fixed.
Although the 5-year ARM is cheaper to carry each month, but it’s not for everyone. For one, the 5-year ARM carries long-term interest rate adjustment risk and not everyone is comfortable with that. Another point is that 5-year ARMs may be unavailable to certain homeowners based on current lending guidelines.
However, if you’re looking to save money each month, or know you’ll be moving in the next 5 years, it’s a really smart time to explore what a 5-year ARM can do for your household budget.
Call me at 513-443-2020 or click here to send me an email.
I will help you review your situation and, if the ARM meets your goals, we’ll take an application and get you a closing date.