Mortgage Borrowers Play a Bettor's Game

With the economy facing a Fed tightening cycle, why is a growing percentage of prospective homebuyers gambling on adjustable-rate mortgages?

The odds would seem to be against such a bet, with fed funds all but certain to rise this summer and fixed-rate loans still carrying historically low rates just above 6%.

Still, about 35% of all mortgage applications are for those with rates that fluctuate with the market, the highest such percentage in almost a decade and more than double the rate of 2003.

The temptation and inclination may reflect cost. Currently, adjustable-rate loans carry average yearly interest of 3.87%, compared with about 6.32% on a 30-year fixed. The spread -- which typically widens when fears of a rate hike grow -- could easily close up and reverse, however, when the rate is recalculated, with that low rate turning into a much higher rate.

The recent spike in the number of buyers taking these loans indicates many people are confident that an adjustable-rate mortgage won't become a huge burden later, either because future rates may not be that much higher-- or possibly even lower -- or they plan to sell the property before the low introductory rate expires.

Last week, the yield on the 10-year Treasury note, the main gauge for mortgage rates, was at 4.60%, nearly a full percentage point higher than in mid-March. Fixed-rate mortgage rates largely reflect that surge and are at their highest level in nine months.

The cost of adjustable-rate mortgages, or ARMs, has risen as well, though not nearly as much. According to the Mortgage Bankers Association, an industry trade group, the average adjustable rate of 3.87% is just 24 basis points higher than a year ago.

When the Fed finally moves, mortgage rates will continue to rise, according to Doug Duncan, chief economist for the Mortgage Bankers Association.

The Long and Short of It A national Mortgage Rate Snapshot
	Week Ended May 27			Week Ended May 20			One Year Ago
	30-Yr	15-Yr	1-Yr ARM	30-Yr	15-Yr	1-Yr ARM	30-Yr	15-Yr	1-Yr ARM
Interest Rate (%)	6.32	5.69	3.87	6.30	5.67	3.99	5.31	4.73	3.63
Fees and Points (%)	0.6	0.6	0.6	0.7	0.7	0.6	0.6	0.6	0.6
Source: Freddie Mac