Less than a month ago, around the middle of July, I reported that the 30-year fixed rate mortgage loan interest rate was nearing 6%. It never went over 6%, but instead started dropping back down. As of July 15, the average 30-year fixed rate according to Forbes was 5.86% and the average 15-year fixed rate was 4.97%. It may not appear to be a big difference in interest rates, but when you convert it into actual money at the elevated prices of homes, it makes a difference.
The typical U.S. family will spend an additional $400 on their mortgage payment each month than they would have in January, according to the Federal Reserve Bank. It could be the difference between qualifying for a mortgage, not qualifying or looking for a less expensive property, either way, the average prospective homeowner is affected by the rate fluctuation and is likely watching the daily activity closely.
To help fill the gap for some borrowers, the interest rates of adjustable rate mortgages (ARMs) are increasing. The Mortgage Bankers Association indicated there was a 3% increase in people applying for ARMs since January.
The popularity of the adjustable rate mortgage peaked in 2009, helping to create the financial crisis. This was because ARMs carry a lower interest rate than fixed-rate mortgages at the beginning of the loan, then they adjust at regular intervals based on one of several indexes. This allowed lenders to make loans with ultralow teaser rates to subprime borrowers who, when the rates went up, could not afford the new payment and ultimately let their houses be foreclosed.
Although ARMs certainly have their place in the real estate world, we don’t want to go back to those years. It can be a good option as fixed rates increase to help buyers qualify for a mortgage with the hope of being able to refinance at a later time if the rates go down. The risk in this is the temptation to buy too much house that will end up being too expensive down the road. This was part of the fallout of the financial crisis.
It’s also a good option for buyers who may not plan on owning the property long-term or who are confident their income will increase enough to keep up with mortgage rates as they adjust. The calculation is whether the monthly payment savings with an adjustable-rate mortgage is worth the risk of increased rates.
Don’t let someone talk you into this just because you are crazy anxious to get into a home. Understand the complications and risks associated with an ARM, do the math and avoid being enticed by pricey upgrades just because you realize you will actually qualify for them.
On July 26, the Federal Reserve has its next meeting and it is rumored that the prime rate will increase by 0.75% again this month. My guess is a couple of months from now, buyers may be wishing they can get a 6% rate.
So, we’ll wait and see what effect, if any, that has on the daily rates.
