Excitement Aside, Mortgage Rates May Not Decrease

Charles Schwab published an article that gives a nice clear break down of the reasons why we can’t bank on long-term mortgage interest rates decreasing further. They’re still low, historically speaking (about 6%), but they have actually increased over the past month or so compared to what they’ve been the past several months, (about 5.5%) even in the wake of all of the Fed discount rate cuts and the inflation scare.

Equity Line rates have decreased dramatically over the past year because they follow the Prime rate which is now down to 6%. Other adjustable rates seem like they should be nice and low too, given the performance of the bond markets they follow, but investors are weary from adjustable loan default rates and aren’t particularly eager to buy any more of them. So more often than not, these days the 3/1 and 5/1 ARMS (fixed for 3 and 5 years respectively) are more expensive, or at least as expensive as the 30-year fixed rate.

The 5/1 ARM used to be a popular mortgage both because the rate was slightly below the 30-year fixed and the majority of home buyers don’t expect to own the same home for longer than five years. In contrast to what happened with SubPrime loans (in which case people had low initial fixed rates that increased so high after the second year that they could no longer afford their mortgage payment), people who have existing Prime adjustable loans are probably happy to find their rates decreasing. Which makes it tempting not to refinance into a fixed rate – but when rates increase all around, those annual adjustments won’t be so pleasant.

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