Vail Daily column: Adjustable rate mortgages likely to jump
November 18, 2016
If you have an adjustable rate mortgage loan you've probably grown very complacent about the down side (which is that your rate could go up) because the last several years most adjustable have kept their rates in the 3 percent range, which has been a terrific bargain for millions of homeowners.
But we live in a new world now, and the market dynamics are starting to work against adjustable rate mortgage (ARM) loans. Typically ARMs are tied to adjusting in sync with either the 10-year T-Bill, the 1-year T-bill or the 1-year LIBOR rate, plus a "margin" (or markup).
For the last several years all of these indexes have been extremely low, often in the 1 percent range. This allowed homeowners to enjoy the longest run in history of rates below 4 percent. Since the election there seems to be some fundamental changes going on in the world financial markets. These include at least two fronts.
First, the Trump policies being talked about are viewed by the world as very isolationist in nature in terms of international trade. Trump talks about getting rid of NAFTA (the North American Free Trade Agreement) which has been hugely helpful to stabilizing the Mexican Economy. He is also critical of the Pacific Rim Treaty which encourages free trade between 12 Pacific Rim countries including China. This has sent the Mexican peso reeling, and caused angst in the Asian financial markets. This has also caused a inflow of money to the US stock markets (which at least at the moment are performing better than their foreign counterparts due to fears of declining business fortunes brought on by dismantling trade treaties). All of this makes holding US T-Bills less attractive, which is pushing up mortgage rates. The yield on the 10-year note has risen nearly a half percentage point in about a week.
The second thing is the Trump policies at stimulating the economy. In theory, blocking foreign goods could be good for US businesses. But the trade off is US goods will cost more. This could trigger inflation in the US, which would also be bad for bond holders and force up interest rates.
That interest rate increase could also be the other foot finally dropping on the massive amount of debt the government has accrued, which is somewhere around $19 trillion dollars. When bonds mature, either the Feds have to have the cash to pay them off (which short of calling the mint and telling them to send over a few semi loads of $1,000 bills is not going to happen) or they refinance them at current market rates. If they print the cash, inflation will soon follow. If they issue new bonds and pay a higher rate, the deficit will grow. Combine these two issues with Trumps proposed tax cuts and let's say, the two ends are even farther apart. Of course Trump thinks tax cuts will stimulate job growth therefore meaning more people will be paying a lower rate of tax on more income resulting in increased income to the government. That's a great theory, but it's far from proven.
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The bottom line here is the party is likely over for adjustable rate mortgages and it's time for any homeowner holding one to evaluate the potential downside if short term rates increase. It's time to dust off the paperwork from when you took the loan out and read it, and if you're not sure call a mortgage professional for a consultation.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.
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