Monday, February 13, 2006

"Is Your ARM Broken?"

The Fed has raised interest rates 14 times since June 2004, each time by a quarter-point, bringing the cost of overnight loans banks charge each other to 4.50 percent.

However, for the first time in memory, 30 year fixed rate loans are lower than adjustable rate mortgages.

Rates on ARMs continue to rise while fixed rates remain stable. The Federal Reserve has raised the Fed Funds rate 14 times in the past 19 months more than quadrupling short-term adjustable interest rates. In spite of this, long-term fixed interest rates have failed to rise much at all. Because most indices are lagging, even if the Fed leaves rate alone, your ARM will continue to rise.

Inverted yield curve
As the Federal Reserve has raised short-term rates, it’s become more expensive to keep adjustable-rate mortgages. Usually when short-term adjustable mortgage rates go up, long-term fixed rates go up as well. But, confounding many experts, that has not occurred. The average 30 year fixed loan from Jan 2005 until Jan 2006 has increased from an annual rate of 5.24% to 5.79%.

The upshot is that ARMs are getting more costly than fixed rate loans. It appears that the advantage of an ARM over a fixed-rate mortgage is gone.

If you want more information regarding your current loans and would like an analysis, please email me or give me a call so that you can fix your ARM if it is broken.

5 Comments:

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