mortgage rates
An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices. Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is not to be confused with the graduated payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise.
Adjustable rate mortgages are characterized by their index and limitations on charges (caps). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.
cardinalfanusa
asked:
"I keep hearing that mortgage rates will probably hold steady until mid-2008. They've already increased from 6.15 to 6.75 in the past 6 weeks. I'm building a house, and won't be able to lock in a mortgage rate until probably mid-August. Should I "buy" my mortgage rate at 6.75% now for $750, or should I hold off? What are the odds that rates will top 7.25% within the next three months?"
Question posted courtesy of:
achievablemortgages replied:
"If you can lock at that rate right now for 750.00, my advise would be to do it. No one has a crystal ball, but rates show no signs of falling any time soon. As you stated previously, rates have risen by over .5% in the last couple months. Take the bird in the hand. It'll give you peace of mind."
Neerdowellian
asked:
"We're in the market for a house, and it would seem that the lowering Fed rate would trickle down to the mortgage business. Instead, those rates keep going UP! How do they expect people to help out the economy by buying homes when they keep making it so unattainable and unattractive?"
Question posted courtesy of:
Pat B replied:
"Lowering the Fed rate primarily effects the amount of interest banks and financial institutions charge each other when they borrow money from each other and from the Fed. In checking recently, mortgage rates are holding pretty steady, not going up or down. If the rates that you are being quoted are going up, you might want to check your credit score. If you have good credit and good debt to income ratio, you should be able to get a mortgage between 5.5 and 6% right now and frankly those are great rates."
Peilthetraveler replied:
"Bank have gotten hit hard by people that have walked away from their homes and they are having to sell these homes they forclose on for less than is owed. So the banks are keeping the extra differnce in rates to increase their profits and make back some of that money they have lost in the last year.Government is actually pretty pissed about this, but the banks want their money back."
Randall F replied:
"So you still believe in the 'trickle down' theory, huh? You must have voted for Bush. The banks are sticking the extra profits in their pockets. That's what corporations do. Do you think they give a crap about you? Hahahaha!"
AM-NM centaur replied:
"Mortgage rates are more closely tied to the 10-Year Treasury Note and *not* to the Federal Funds Rate. Due to the AVAILABILITY of credit, mortgages have not dropped as much as they have in the past. The spread between mortgage rates and the 10yr Treasury is about 1/2% larger than normal.Ronald Reagan's "trickle-down economic theory" (actually Arthur Laffer's) reminds me of what my middle school social studies teacher said back in the 70s about slavery. He told graphic stories of the conditions slaves faced on the boats to America. The slaves were shackled to different "shelves" in the hull of the boat and all their urine and feces would trickle down from the top to the poor schmucks below. That graphic story paints Trickle Down Economics in a whole new light."
Ron Berue replied:
"Its going to take A LONG TIME - MONTHS - before the general public feels the effects of any rate cut.Those rates are for the transactions between A] banks B] and the banks to the Fed C] and/or the Fed to the banks.Thanks for asking your Q! I enjoyed answering it!VTY,Ron BerueYes, that is my real last name!"
ADP_14 replied:
"Mortgage rates are not driven by fed rates. They are driven by the bond market, which competes with mortgage backed securities for capital. Investors need to buy the mortgages from the originators, and the rates are determined by their pricing models.As a previous poster noted, mortgage rates follow the 10 year treasury most closely. The spread between the 10 year and mortgage rates has been increasing due to increased fears of inflation (which the fed cuts make even worse) and the general perceived riskiness in the mortgage market (forclosure rate?). As such, investors are saying they'd rather invest in other securities because the rates are not paying them enough for the risk they are taking. That is why rates sometimes go up when the fed cuts."
areusmarterthanafifthgrader
asked:
"from regression analysis I found that there is a strong positive relationship between the unemployment rate and mortgage rates. I can't figure out why. Any thoughts?"
Question posted courtesy of:
worldpeace replied:
"I dont think there is any direct cause and effect explanation for this correlation.Rather, both of these factors are part of broader economic forces which are surely related, but not related just to each other.In general, the economic is going through a slump right now. That will force the unemployment rate to go up because employers are cutting jobs because they are not selling as much. Mortgage rates are going up because the banks and lenders are facing a liquidity crisis, and because the housing market is in a slump. For too long, lenders and borrowers alike assumed that housing prices would keep going up, and this led to an abuse of credit. Now this easy access to credit is being curtailed, and mortgage rates are going up to compensate."
OPM replied:
"You need to be careful, mortgage rates are prospective rates and unemployment data is retrospective data. Data collected at time t may in fact reflect time t-1 and forward rates at time t+359. Further, the mortgage market has itself changed over time being deposit funded and insurance reserve funded twenty years ago and mutual fund owned today. That creates different owners with different liabilities.Finally, time series regressions are very difficult to do correctly. It is an entire field in itself.Unemployment is related to bond prices because higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices, so there should be a positive relationship with prices but a negative relation with rates. However, a mortgage could be thought of as 360 forward obligations and the current unemployment level does not reflect future beliefs about the economy in a direct manner.If you find a positive correlation that is very strong, there is also a possibility that you have a unit root problem and your t-tests are misspecified. The significance could be spurious. It partly depends upon whether the relationship is stationary or not. If you are running your tests using an ordinary statistics package, it is likely your correlation method is invalid."
Ryan H replied:
"Your result most likely stems from an omitted variable. What other variables are you including in your regression. Have you tried lagged variables of unemployment? Also what data are you using. If you are using data from the past 10 years following the 2001 recession unemployment starting declining. During the same time period the large demand for US assets caused 10-year bond rates to fall to extremely low rates. In turn mortgage rates also fell. Again I'm wondering if you are missing a couple of key variables."
don1862 replied:
"It does seem logical to me that higher unemployment rates would decrease mortgage rates. However, mortgage behavior is extremely complex, and rates are influenced by wany factors. Other factors could be moving to increase interest rates at the same time unemployment is moving to reduce rates."
Jocelyn W
asked:
"We are currently building a home and won't actually secure the financing until February or March of 2009. What is the likelihood mortgage rates will go down and by how much? We plan on locking in a rate, but don't want wait too long before they start going up."
Question posted courtesy of:
Dale H replied:
"You should be able to get a lock with a float down option. That is, you can protect yourself from rising rates by "capping" your rate. If rates are lower once the house is substantially complete, you can float down to the market 30-60 days prior to closing.No one can say what will happen with rates with any certainty except they will change. However, it stands to reason that the rates should get better because now the Fed is explicitly guaranteeing Freddie and Fannie obligations so the yields on those securities (which drive retail rates) should fall until they are approximately equally to Treasury securities of the same maturity. At present, there is a 1% difference in the yields. The markets should adjust until that spread is substantially reduced. Otherwise, a smart investor would prefer mortgage backed securities over Treasuries as they have a higher return with no additional risk.For some reason, the markets have not reacted fully to this change, but that may be because the bailout is still up in the air. Freddie and Fannie assets are not the toxic assets involved in the bailout generally speaking, but they have lost favor with Foreign investors in particular since the crisis began. In short, you may not need to worry about what will happen with rates provided your rate lock allows you the option to float down once the home is nearly complete.Good luck."
Biran_Sefar replied:
"The government bailout of the Wall Street fat cats will so cripple the economic lives of every single American for generations to come that only the super-rich will ever be able to dream of home ownership. We are fast on our way to becoming a nation of landless peasants.The rich get richer while hardworking Americans have less and less in their lives.Bush and McCain want to rob at least 700 billion dollars from hardworking Americans and their families to pay the salaries of all the super-rich fat cats on Wall Street. The middle class will essentially not exist any more if this thing ever passes. And, the criminals in Washington are co-conspiring with the criminals on Wall Street to see to it that our children, our grandchildren, and generations even further than that in the future will be reduced to virtual slavery in order to pay off this huge debt that the wealthy top 5% of the country has run up through CEO excess and criminal mismanagement.Let's see some CEO's get their salaries cut by two-thirds; let's see their homes foreclosed and all of their belongings auctioned off. Let's see their kids in rags, riding the school bus, and in line for the breakfast program in school. Let's see some of those mega-wealthy CEO's and their wives on the street corner with signs reading "Will Work for Food." Because if they aren't willing to pony up all of their assets, then why should hardworking Americans have to?Until the government is willing to bailout American workers and their families by ensuring they can keep their homes, by ensuring they have access to affordable healthcare, and by ensuring that they receive a fair, living wage in a safe working environment that is tolerant of workers' collective bargaining, then I reject any so-called bailout the criminals in Washington propose. As long as the government cares more about bailing out the super-rich corporate criminals that have gotten fat off of robbing our economy blind and that have inflicted a far more serious wound against our nation than anything that resulted from 9/11, then I oppose any so-called bailout.Keep the heat up on Congress. Tell them NO BAILOUT FOR THE RICH. Bailout the American people!!! NOT CORPORATE CRIMINALS!!"
Brad H
asked:
"I just saw that a 30 year fixed mortgage is 6.07% and a 5/1 ARM is 5.91%. What are the reasons why these rates differ by nearly .2%?"
Question posted courtesy of:
Tammi D replied:
"ARM = adjustable rate mortgagesurely that's explanation enough"
Special K replied:
"The 30 year fixed will have the same interest rate (6.07%) for all thirty years of the mortgage. The 5/1 ARM will only have a fixed rate 5 years, and then will change (can go up) in the sixth year and every year after until thirty years. The first mortgage is riskier for the bank because they are guaranteeing the rate for all thirty years, so they charge you a higher rate of interest."
Flea replied:
"Because corrupt bankers know they can entice naive customers with lower adjustable rate and then rape them later and make huge profits when the customers rates go up. It's American corruption 101."
chrissy replied:
"A fixed mortgage is a mortgage at a set rate for a set period of time. An ARM can offer a lower beginning rate because it is adjustable over the life of the loan - meaning the loan company will take 5.91 now and in 5 years the rate can and will increase to 7+... The financier of the ARM will make their money back on the back end of the loan. These loans are how so many people got into trouble lately - they were able to qualify for a larger total mortgage because the payment on the ARM was do-able, but once the ARM expires and the rate adjusts so does the payment... I don't recommend an ARM with the market being so unpredictable - many people got one assuming that they could refinance at a do-able rate before the ARM expired, but because interest rates shot up they got screwed. Practice responsible lending - banks want to make the deal - you need to make sure you can make the payment..."
El Zacatecas replied:
"A fixed rate is for the life of the loan. When you see an ARM it is usually lower to sucker in the people who don't qualify for a fixed rate. As time goes on depending 0n the market for housing development the US government may decided to lower the rates or make them higher which in turn the mortgage companies, banks, credit unions and so on adjust it for themselves to make a profit. In other words the ARM wont stay that low for very long."
Laissez-Faire Guy replied:
"Because after the fixed period of the ARM is over, they can adjust your rates up based on some predetermined formula. That's what is catching a lot of people now. A lot of people bought in thinking they could afford higher payments in the future by some miracle, or sell because their home would be worth more. They are now caught with higher payments and inability to sell for enough to break even after expenses.I bought my place in April 2004, and when shopping for a mortgage, I was getting offered a lot of ARMS. If I would have taken one, I could have afforded a bigger place. However, at that time, interest rates were pretty much at historic lows, and I knew damn well that if I couldn't afford a fixed payment then, I wouldn't be able to afford the higher adjusting rate a few years down the road, so I went with smaller place that I could afford the payment on for a 30 year fixed mortgage."
sbyldy replied:
"A fixed interest rate remains the same through the entire loan, and an adjustable rate has a "float" where your interest rate can change dramatically, unless you are careful. If you take an ARM, make sure you get a cap and a ceiling, so you can still make your payments. A cap says they can't increase your interest by more than a certain percentage during any time period (ours was 2% every two years) up to a maximum ceiling that they can't charge above period(ours was 5% over the initial interest rate). The loan agent will have the same protections the other way, they will never charge less than the original interest rate. As you can see an ARM is a little riskier for the buyer, so they give you a lower beginning interest rate."
mtgguy replied:
"less risk on a fixed rate then adjustable."
I_Love_McRedneck replied:
"Because ARM's attract people with bad credit by confusing them with this seemingly lower rate. In 5 years, your payment can nearly double though - and rise every year after. Stick with the fixed rate, or lose your home in 5 years. It's happening all throughout the country right now..."
matzael replied:
"With a 30 year mortgage a bank has to guess what rates are going to be for the entire term and what yield they're losing on lending that amount of money to you for a longer period of time.With a 5 year ARM they only have to commit for 5 years and then reset the rate to whatever the current market is. Obviously this is easier to do for shorter periods and much more accurate. The rates start a bit lower since they'll be corrected in 5 years when market conditions vary.Like the above people have all stated the ARMs that are out there now are adjusting up by quite a bit. If you are considering that type of loan make sure you can afford the payment at the maximum rate the mortgage allows for in the time you'll be in the house. If not, then it's a very risky loan to sign up for."
Shawna Marie replied:
"I'm not sure why people associate ARM's with bad credit. Any lender that offers a 5/1 ARM is a CONFORMING lender. That means you have to have GOOD credit to qualify.Until yesterday, ARM rates were actually higher than fixed rates. The reason they are different is because different parts of the market control the different rates. The 30 year is controlled by what the 10 year bond does, and the 5/1 ARM is controlled by several markets, such as LIBOR. Prime rate is it's own market, which is controlled by the Fed (that's the rate they just dropped .50%). Prime rate has to do with variable rate loans, like a HELOC (home equity line of credit).For more information, e-mail me. I'll be glad to answer any more questions you might have, as well as send you information about the different markets."
Good info about 30 year mortgage rates over the past fifty years or so including link to a chart showing historic perspective.
You can save thousands of dollars by conducting a little bit of research before you talk to your mortgage lender. See how you can save over $2,000 by negotiating a lower interest rate with your banker.
The possibility of falling or low interest rates are all up for the taking so if you have been under a mortgage loan for quite some time, then you can follow these steps to refinancing a mortgage to be able to save a lot of money since this makes your monthly repayments lower.
Informative article
There are several types of mortgages offered by lenders in the market. The most common of these types is fixed rate mortgages. Fixed rate mortgage loans are characterized by fixed rates and monthly payments that are generally for a 15-year and 30-year periods.
