Watch Out for the Adjustable-Rate Mortgage Pitch

June 24, 2013 No Comments »
Watch Out for the Adjustable-Rate Mortgage Pitch

Over the past couple weeks, mortgage rates have risen roughly 1% across the board.

If you look at Wells Fargo’s mortgage rates, which I highlighted late last week due to their meteoric rise, you’ll notice the 30-year fixed is now pricing at 4.875%, up from 4% about 10 days ago.

Consider the fact that back in early May, a rate in the low 3% range was the norm for the 30-year fixed.

The 15-year fixed has climbed similarly, from 3.125% to 3.875% in about 10 days. A month earlier, it was around 2.5%. In other words, conditions aren’t good in mortgage land, to put it more than mildly.

It’s not much different for adjustable-rate mortgages either – the popular 5/1 ARM is now pricing at 3.125%, up from 2.5% a week or so ago.

Mortgage Payments on the Rise

What this all means is that mortgage payments are rising, even if you’re refinancing your existing mortgage to a much lower rate.

The payment you could have secured earlier this month will now be significantly higher, to the point where your refinance may not even make sense anymore.

[The refinance rule of thumb.]

If you’re looking to purchase a home, your purchasing power has been severely reduced. Check out my mortgage payment chart to see what you can afford based on today’s rates.

And as mortgage rates continue to rise, banks and lenders will increasingly look for ways to soften the blow, of course, without actually lowering rates.

So all those ads touting record-low fixed-rate mortgages will quickly and quietly make the switch to a 5/1 or 7/1 ARM instead.

Why? Because they know rates on ARMs will sound a lot more appealing to homeowners and prospective buyers who have been staring at rates in the 3% range for months now.

Nobody wants to hear that their interest rate is now 4.5%, or worse, somewhere in the 5% range. It’s embarrassing. What will their friends think?

It could even be enough for a prospective home buyer to have a change of heart about buying a property to begin with, especially if it requires getting into a bidding war and paying well over list.

Choose Your Mortgage Wisely

While it may be tempting to go with an ARM instead of a fixed-rate mortgage, there is a whole lot of risk, especially right now.

Everyone pretty much expects mortgage rates to keep rising over the next decade, so your ARM will most likely be more expensive in the near future, once that first adjustment date rears its ugly head.

At the same time, rates on fixed mortgages, despite their recent upward trajectory, are still pretty darn cheap. Just ask anyone over 50 what they think.

And locking in a mortgage at today’s rates isn’t a losing endeavor, it just doesn’t sound as sweet, seeing that rates were a heck of a lot cheaper just weeks ago.

But in hindsight, you might be pretty happy with a 30-year fixed in the 4% range, especially if they make their way past 5% and up in to the 6’s. It’s not unlikely over time.

So if your loan officer or mortgage broker tells you they can put you in a 5/1 or 7/1 ARM instead of a fixed product (and save you lots of money!), question their motives.

They want the loan to sound more attractive to you, and a lower rate with a lower payment will certainly accomplish that.

But don’t discount the fact that the rate will eventually rise, once the fixed period comes to an end in five or seven short years (they go by faster than you think).

Read more: How long do you plan to keep your mortgage?

(photo: Hasan Diwan)

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