All This Inflation Talk Does Wonders For The 5-Year ARM

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Mortgage rates are rising — sharply even — but it’s an excellent time to consider a 5-year adjustable rate mortgage.

November 3 : The “Bottom” For Mortgage Rates

In April 2010, mortgage rates started a marathon run.

Because of economic uncertainty — both domestic and global — the U.S. mortgage market became the darling of the international investor community.  Over a 26-week span, safe-haven demand for mortgage bonds outpaced the available supply, driving mortgage rates down to outrageous levels.

Looking back, we know that market’s (literal) Best Day Ever was November 3. That morning, mortgage applicants in want of  30-year fixed rate loans were greeted with pricing of 4 percent, with 0 points.

Never in history had rates been that low.

Since November 3, however, it’s been a complete mortgage market unwind. On that day, the Federal Reserve announced a plan to inject the bond market with 0 billion and the plan was met with derision. Immediately following the announcement, mortgage rates came off their lows of the morning. They’ve never returned.

In the 7 weeks since the Fed’s announcement, the mortgage bond market has blown past the 26 weeks of gains and, now, it’s gunning for its highest levels of the year.

It’s a historic about-face and it’s killed one of the best Refi Booms in the history of mortgage lending.

As Long-Term Rates Spike, Short-Term Rates Lag

According to Freddie Mac’s weekly mortgage rate survey, average 30-year fixed rates are up 0.625 percent since early-November. On the street, I’ll tell you the number’s actually higher. Probably closer to 0.875 or a full point. The 5-year ARM, by comparison, is up just 0.500.

The two benchmark products are responding differently to today’s market and it’s created the largest interest rate spread between them in history.

• Historical Difference between 30-year fixed and 5-year ARM : 0.42 percent
• Current Difference between 30-year fixed and 5-year ARM : 1.06 percent

As a mortgage rate shopper, there’s two conversations of which to be aware.  The first is that ARMs are decidedly attractive as compared to 30-year fixed rate mortgages right now.  A 0,000 mortgage financed by ARM saves 0 per month.

The second is that, so long as the Fed keeps “printing money”, the spread is likely to widen. This is because creating new money and adding it to the economy makes every other dollar worth less, which is the very definition of inflation.

Inflation is bad for mortgage rates.

Why Inflation Is Bad For Mortgage Rates

To understand why inflation is bad mortgage rates, think like a Wall Street buyer of mortgage-backed bonds.

Mortgage bonds make periodic interest payments to investors, and then a lump-sum principal payment at some point in the future. The payments are all made in U.S. dollars.  Therefore, if the dollar itself is expected to lose value to inflation, investors will demand a higher rate of return.

As the bond term lengthens, inflation risk increases.  Hence, 30-year fixed rates will respond more drastically to the threat of inflation than comparable 15-year fixed rates.

The 5-year ARM is even less affected — mostly because the loan is expected to payoff in 5 years or fewer.

See For Yourself. Compare The 5-Year ARM To The 30-Year Fixed.

The 5-year ARM is less expensive each month, but it’s not going to be for everyone. For one, the 5-year ARM carries some interest rate adjustment risk and everyone will be comfortable with that. Another point is that 5-year ARMs may be unavailable to some based on current lending guidelines.

To see how a 5-year ARM might fit into your budget, though, call me at 513-443-2020 or .

I will help you review your situation and, if the ARM meets your goals, we can take an application and get you a closing date.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan posts intra-day mortgage rate updates on Facebook at http://facebook.com/themortgagereports.