Mortage Rates Turn Upside Down
Every week Freddie Mac issues a general survey of mortgage rates and last week’s results were a shocker: Rates for fixed-rate loans were lower than the rates for ARMs.
If you’re a borrower the conclusion is obvious: Stay away from ARMs. Here’s why:
No Cash Refinancing
If you have a fixed-rate loan you have a hedge against inflation. If rates go higher you’re protected because your rate never changes. If rates go significantly lower you can get a new loan with a “no cash” refinance — that’s a new mortgage where the lender pays your closing costs but you do not get the lowest possible interest rate.
With an adjustable-rate mortgage (ARM) you typically get a lower rate up-front — but if rates rise after an initial start rate then your monthly payments can soar.
2 Percent Difference
Some used to argue that an ARM should be priced at least 2 percent points below a fixed-rate loan to be worthwhile. Plainly if an ARM start rate is HIGHER than the rate for fixed-rate mortgages it makes no sense to get that ARM, no matter how alluring.
For last week, Freddie Mac said that 30-year fixed-rate mortgages averaged 4.80 percent with 0.7 points, down from 4.82 percent from the week before.
The 15-year fixed-rate mortgage averaged 4.48 percent with 0.7 points, unchanged from last week.
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 4.85 percent last week, while one-year Treasury-indexed ARMs averaged 4.82 percent with 0.4 points.
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