Adjustable Mortgage Rates Are Back

Adjustable rate mortgage interest rates in the 6% range adjusting to 9% or more after two or three years. Also during the last two to three years we have had what the economists refer to as an inverted yield curve in the bond market. This phenomenon typically is a sign of inflation to follow. During this time loan originators in the mortgage industry would not quote adjustable rate mortgages because they actually were more expensive than a 30 year fixed.

Why would you quote a customer a 5/1 adjustable at 5.25% when you could give them a 30 year fixed at 5%.

During the last few months the adjustable rate mortgage has come back to our rate sheets in a good way. Currently a good borrower can go find a 5/1 adjustable rate mortgage (ARM) around 4%. The thirty year fixed rate is around 5%. These loans are not bad because the margin is low. When an adjustable rate loan adjusts after the initial locked in period, it adjusts to the total of a margin and an index.

Typically the index is something fairly steady like a LIBOR or T-Bill index and the margin (the number the consumer should make note of) is added to the index to determine the new adjusted rate. Our margins today are low, usually 2.25% or 2.50%. Those bad subprime loans had indexes of 5-8%. This is not a bad loan if the customer plans to be in the home five years or less.

The second story behind this news is the general perception of where mortgage interest rates are headed in the near future. Good adjustable rates point towards lower interest rates in the short term. (1-3 years) When we had the inverted yield curves three years ago the general consensus was that inflation was on the horizon. Now there is little lending going on and interest rates may head south in order to attract business.

One fun aspect of my job is that I get to learn from my customers who tell me their opinions on everything from what is a nice house to who to vote for. Last week I was talking with a very astute financial advisor who was still actively consulting even though he was well into his 70’s. He pointed out to me why we he felt we are headed for a period of deflation. Very simply he said that gross national product is the result of the money supply times the velocity of money. The government can increase the money supply all they want because the velocity of money is still shrinking. Money is not changing hands. Banks are not lending because they are concerned about foreclosure rates so they are increasing reserves on their balance sheets.

The marketplace will have to maintain the lowest interest and mortgage rates possible to force lending. He predicted a terrible year for banks, with a lot of failures and a year of low interest rates to attract whatever business is left.

Written by Preston Ware
First South Mortgage
Tel: 704-542-8057
www.prestonware.com
Email is preston@prestonware.com.