There has been a lot of angst lately over the concept of “tapering” which is the latest buzzword when talking about the Federal Reserve Banks involvement in supporting the economy. What tapering refers to a gradual winding down of the Fed’s purchases of mortgage-backed securities and other government debt.
This has caused enormous volatility lately in the markets lately, causing stocks to soar and then fall back, and bonds to fluctuate more in an hour than they used to in several days. Mortgage rates often change two to three times a day.
Nationally this has left borrowers perplexed as to what to do — should they lock and grab what historically is still not a bad interest rate, or should they wait and try and get a little bit better deal. Many homeowners who simply didn’t get around to taking advantage of the rates in the mid-3 percent range are pretty sad these days.
But there are some bright spots out there if you have a rate that is above the low 4 percent range and are looking to lower your payment, or purchase a home. These opportunities lie in the old standby of an adjustable rate mortgage (ARM’s). Rates for these loans are still in the mid-3 percent range.
If you currently have a ARM you likely are still enjoying a low rate, but don’t fool yourself into thinking life will stay that good. Your rate will adjust to a set index (often the T-bill or the Libor) plus a margin or markup of 2.5-3.0 percent. When the underlying index goes up, so will your rate.
In less than a week last month we say the yield rate on the 10-year treasury bill rise over a full point, and in time many other indexes such as the LIBOR (which is the index most ARMs are tied to) will probably follow, when that happens your mortgage rate will follow.
Today’s ARMs are usually fixed for five or seven years and generally are about a full point or more below a 30-year fixed. That makes taking out an ARM a smart move for some, but certainly not all, people. If you feel that in five to seven years (or even eight to nine years) that you might move on, downsize, or refi to pull cash out for your kids education then an ARM is perfect.
Those who should avoid an ARM include individuals who plan to live in their home for longer than eight to nine years, such as young families with children in school and secure jobs. Also, those on a fixed income, or that might be on a fixed income in eight to nine years , should choose carefully. If you are currently working but going to retire in five to seven years it is likely your cash income may drop, and you might find yourself stuck being unable to refinance due to your income (even if you have a pile of liquid assets to live off of) and a rising interest rate.
And if you’re old enough to remember past 2007 you probably recall when 6 or 7 percent was a big deal for a fixed rate loan. Indeed, if you are really old like me you might recall the early 1980’s when inflation and recession were both whacking the economy (with very little Federal intervention) and rates went to 18 percent.
A rate in the mid-4 percent range is still a very respectable rate historically, and presents opportunities to acquire your dream home, or to leverage your working capital. And plan carefully if you currently have an adjustable rate note.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon CO and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.