Adjustable Rate Mortgage are BACK!!

Adjustable Rate

Mortgages

Fascinating!!!  Absolutely Fascinating!!

Over the weekend in the Virginia Pilot, I noted a Navy Federal ad boasting of a 3.05% interest on a 5/5 adjustable interest rate mortgage.  Today, I see a RisMedia's blogpost, self titled as Leader in Real Estate Information, along with a couple other touting the comeback of the adjustable mortgage due to the rising interest rates.

With interest rates within a 1 point or so of absolute historical lows, the home buyer must carefully evaluate the adjustable rate mortgage option.  To take an adjustable rate mortgage just for a lower payment without looking at the bigger picture or evaluating the entire situation can be a huge mistake.

No doubt if you are buying in 2014 and will be moving or expect to move in three years, you are a good candidate to buy a home with an adjustable rate mortgage.  With the low introductory rate, even a rapid run up in rates(not expected), your rate would at the highest point(based on Navy Federal's start rate) would be 5.05% when you sold the home even if rates went to 5.75%.  

Saving money on one's mortgage is always very attractive.  In the example above, the home buyer/owner would absolutely spend fewer dollars than if he/she locked in a 30 year mortgage in current mid to high 4% range.

Yet, if a home buyer unsure if he/she will sell in 5 or 10 years decides on a adjustable mortgage, he/she could find themselves in a much less positive situation.   In five years, it is very hard to predict the interest climate that far out.  It even gets worse for 8 years or 10 years out.

With interest rates low(artficially low) for all of 2011-2013, it is very possible that rates could rise over the next few years.   Perhaps they rise and settle at the historical average of mid 7% interest rates.

The homebuyer unsure of a move date would see increasing interest rates and house payments each year.  Then when the 5 year period is up(Navy Federal's example), the homebuyer, now home owner, would have to refinance to a 7% interest rate for the next 5 years(if moving in 10) or next 25 years possibly.

This minimum 2.5% premium in interest for 5 to 25 years would caused the homeowner to spend substancially more for housing than he/she would have if she would have locked in a 30 year 4.5% mortgage at the time of purchase.

As your situation can be different both at the price point of home you seek to purchase and the interest rate, based on your credit score, precise examples were not presented.  

Yet, it should be abundantly clear that a home buyer must carefully evaluate the advantages and disadvantages of an adjustable mortgage.

Your Realtor can help you and point you to an expert Mortgage Officer for a detailed discussion.

Consult your Realtor today!!

Mortgage Matters....End of 30 year fixed term Mortgage

Keeping you updated on the market! For the week of  August 12, 2013 MARKET RECAP More of the Same, But for How Long? For now, the cavalcade continues; that is, the cavalcade of home-price increases that began nearly two years ago. CoreLogic's Home Price Index shows prices increased 1.9% in June compared to May, which marks the 16 th consecutive monthly increase. This latest increase lifts the index's year-over-year gain to 11.9%. For 2013, home prices are already up nearly 10%. But not all indicators suggest the trend will continue unabated. Trulia's data show asking prices dropped 0.3% in July compared to June, which marks the first monthly decrease since this past November. A slowdown in home-price gains wouldn't necessarily be bad. We've argued in the recent past, that double-digit yearly price increases are unsustainable. A lower rate of annual increase would be a more sustainable rate, and one more attuned to historical norms. The last thing any of us wants is another bubble market followed by a bubble burst. We've also a seen a slowdown in the rise in the price of mortgage funding over the past month. Rates, though higher than they were six months ago, have stabilized. What's more, it appears consumers are becoming acclimated to the new higher-rate reality. A recent survey by Fannie Mae finds that 60% of respondents believe interest rates will increase over the next 12 months. At the same time, three out of four of these respondents believe now is a good time to buy a home. The prospect of buying an appreciating asset appears to trump the higher cost of financing that asset. But are the respondents expectations properly calibrated? After the latest employment report, we are less sure of interest rates rising. The employment report, issued the past Friday, points to sluggish job growth. In July, businesses increased payrolls by only 162,000, roughly 20,000 below most economists' expectations. To be sure, the unemployment rate dropped to 7.4% from 7.6%, but this was attributed to a lower labor-participation rate, which fell to a 35-year low. The current trend in labor participation runs counter to recent history. After a recession, the labor force usually grows. But this post-recession period has been an anomaly. We are four years into a recovery, yet labor-force growth, as well as job growth, remains stubbornly stagnant. Many economists believe disappointing job numbers won't dissuade the Federal Reserve from throttling back on quantitative easing. In fact, a few economists speculate the Fed could throttle back as soon as next month. At a minimum, that means mortgages won't drop any further. We're not convinced, and we don't think most market participants are either. Mortgage rates have held steady for the past six weeks, as has the yield on the benchmark 10-year U.S. Treasury note. Given stubborn economic weakness, we expect quantitative easing to continue through the remainder of 2013. Moreover, quantitative could even extend deep into 2014, depending on who takes the reigns of the Federal Reserve next year after Chairman Ben Bernanke steps down. Of the frontrunners, one in particular, Janet Yellen, appears keen to keep the Fed's current monetary policies going for a while longer. Economic Indicator Release Date and Time Consensus Estimate Analysis Mortgage Applications Wed., Aug. 14, 7:00 am, ET None Important. Purchase activity is picking up as consumers become acclimated to higher lending rates. Consumer Price Index (July) Thurs., Aug. 15, 8:30 am, ET All Goods: 0.2% (Increase) Core: 0.2% (Increase) Important. Consumer-price inflation remains below the Federal Reserve's target rate and will have little impact on interest rates. Home Builder's Index (August) Thurs., Aug. 15, 10:00 am, ET 55 Index Important. Builders remain confident, but optimism appears to be plateauing. Housing Starts (July) Fri., Aug. 16, 8:30 am, ET 895,000 Units (Annualized) Important. Starts are expected to return to their upward trajectory after June's disappointing pullback. The End of the 30-Year Fixed-Rate Loan?  President Obama caused a stir this week when he said he'd like to see the private sector take over as the primary driver behind the mortgage market. The president went as far as to say he'd like to see Fannie Mae and Freddie Mac dismantled. It's a worthwhile idea, but there are a few obstacles. For one, the government, through Fannie Mae, Freddie Mac, the FHA, and the Department of Veterans Affairs, backs 90% of all newly originated mortgages. For the most part, there really is no private mortgage market. At the same time, the president said he'd insist on keeping the 30-year fixed-rate mortgage affordable at today's low rates. Unfortunately, the goal of the prevailing rate on the 30-year fixed-rate mortgage is incongruous with the goal of privatizing the mortgage market. We say that because private money won't lend for 30 years at today's rates without government backing. So does this mean the end of the 30-year fixed-rate mortgage? That's unlikely. At the same time, it's also unlikely we'll see a mortgage market dominated by the private sector. In other words, it looks like business as usual into the relevant future.