The Federal Reserve said Wednesday that it will work to keep short-term interest rates low but will gradually shut down a securities-buying program that has helped make mortgages exceptionally affordable.
How does this affect the appeal of various types of mortgages?
In a nutshell, it suggests there’s no reason to postpone getting a new mortgage if you want to refinance or buy a home.
It seems very unlikely that rates will drop significantly from today’s already-low levels, and there’s an outside chance future Fed actions could push some mortgage rates up, though the Fed could well change policy again if it saw that happening.
While things could change quickly, the decision to keep the federal funds rate at 0 to 0.25% for a considerable period looks like good news for many homeowners who already have adjustable-rate mortgages.
Many of these loans are keyed to short-term securities like U.S. Treasury notes with one-year to maturity. If these indexes stay low, homeowners will continue to enjoy low rates when their loans reset, typically every 12 months. Currently one-year Treasuries yield 0.43%. An ARM with a 2.75-point margin would therefore reset to an astonishingly low 3.18%.
While this is good for people who already have ARMs, it does not necessarily make sense to get an ARM if you are shopping for a new mortgage. Starting rates on new one-year ARMs average 5.386%, hardly any better than the 5.545% on 30-year fixed-rate loans, according to the BankingMyWay.com survey.
One-year ARMs therefore don’t offer enough up-front savings to offset the risk of rate hikes in future resets.
The 30-year fixed loan is a good deal, and many lenders beat the average. J.P Morgan Chase (Stock Quote: JPM) and Wells Fargo (Stock Quote: WFC), for example, offer 5.25%. Use the BankingMyWay search tool to find the best deal, and be sure to consider your credit union.
As they usually do, 15-year mortgages offer a slightly lower rate than 30-year loans, at 5.498%. But borrowers face substantially higher payments with 15-year loans because more principal has to be paid each month. Use the Refinance Interest Savings Calculator to compare two mortgages. If they are both new, be sure to put “1” into the “Number of payments made” window.
In today’s housing market, the three-year ARM doesn’t seem very useful. At 5.29%, it does not offer much up-front savings over the 30-year fixed loan. ARMs can be useful for borrowers who don’t expect to need their mortgages for very long, such as those who will sell in just a few years. But the shaky housing market makes a risky bet out of hopes to sell a home in three years for enough to pay off the old loan, cover a ealtor’s commission and other selling costs and still make a profit.
On the other hand, the five-year ARM, at 4.492%, offers the lowest rate of all the mortgage types surveyed, and the five-year lock on the starting rate could well give you enough time to enjoy a market rebound and sell your home for a gain.
With all ARMs, pay special attention to the index, margin and caps used in resets.
Most mortgage shoppers will do best by keeping it simple: locking in an affordable rate for the long term with a 30-year fixed-rate loan.
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—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.