The Return of the ARM

The Return of the ARM
“The Fed is your Friend”

With the financial markets and mortgage interest rates zigzagging day in and day out, people are wondering where the much hyped “stimulus” is to be found. Though the Fed has aggressively cut rates numerous times to make borrowing cheaper, long term mortgage rates have been creeping up in the past few weeks. What gives?

Most people assume that all interest rates move together. This is far from the truth. In fact, short term investors have very different motivations than long term investors, and oftentimes, rates on short term bonds and long term bonds can move in different directions. In our particular market, with the Fed infusing the markets with cash and lowering short term interest rates, investors park their money into short term bonds, sending short term rates downwards. On the other hand, long term investors worry that too much financial stimulus will be a harbinger of inflation- a disaster to long term value. So, they sell long term bonds, causing long term interest rates to rise. This phenomenon, where short term rates fall while long term rates rise, is known as the steepening of the yield curve. So, what we currently have is a phenomenal opportunity for much cheaper mortgages on the 3, 5 and 7 year adjustable rate mortgages (i.e.. Short term money).

The Fed cannot directly change long term mortgage rates, but it can and does directly affect rates on the shorter end of the yield curve. The Adjustable Rate Mortgages are directly tied to this area of the curve. Though the credit crunch all but wiped out riskier mortgages, safe ARM’s are making a big comeback because their rates are coming down fast. And, as the Feds continue to cut rates to save the economy, the adjustable rates will continue to fall lower and lower.

Currently, the spread between 30 year fixed rates and the 5 year Adjustable Rate mortgage is approximately 3/4 of a percent. On a typical 600k mortgage, the difference is $390 per month- a HUGE amount that can help your clients purchase their dream home or apartment in an environment where every dollar counts. Even though the ARM’s (especially interest only) are harder to qualify for than they were a few years ago, the payments and essential loan programs remain the same: Great rates, Extremely low payments, and perfect for those clients who, like most New Yorkers, move on average every 5-7 years.

Take a look at the following grid which shows the difference in monthly payments between fixed and adjustable rate mortgages:

When showing apartments or houses, if your customers are concerned about high mortgage payments, make sure to tell them about the adjustbles. Give them my phone number, 718-534-5600 x140, and I would be more then happy to walk them through the benefits of the far lower interest rates that the adjustables can provide.