Adjustable-Rate Mortgages Hit New Low

NEW YORK ( RateWatch) -- Loan rates keep falling, and consumers who have long spurned adjustable-rate mortgages may want to take a second look.

The average rate for a five-year adjustable-rate mortgage hit a low of 3.41% at the end of June. That's the lowest mark that rate has hit since RateWatch began tracking the Credit Power Index in January 2007.

The Credit Power Index assesses the interest rate climate for consumers by tracking deposit and consumer loan product rates, using the methodology found here. The overall index -- which accounts for certificates of deposit at four terms as well as personal unsecured loans, home equity loans, new auto loans and adjustable-rate mortgages -- fell for the sixth straight month as rates continue to slowly improve for consumers.

But the real story was the five-year ARM component of the index. The national average rate of 3.41% is a basis point lower than the low set back in October; the rate had fluctuated in the intervening six months before settling at its new low at the end of last month. While most would-be homebuyers are well aware mortgage rates have hit rock bottom lows along with the home prices, the low point for ARMs should serve as a reminder that even lower monthly payments are possible for those willing to assume the risk of a higher rate five years down the road.

Of course, this milestone comes after ARM rates have dropped steadily for years. So have these plummeting rates been enticing consumers to get on board?

The fact rates continue to drop -- the average has dropped even further this week, to 3.246% -- suggests demand has stayed low. Still, there are signs of increased activity. The Mortgage Bankers Association recorded a week-to-week spike of 13% in mid-June mortgage applications, an increase the organization attributed to falling rates. And according to Inside Mortgage Finance, ARMs have become particularly attractive as of late; in the first quarter of 2011, they accounted for 12% of originations, the highest share since the second quarter of 2008.

But some say that thinking of the mortgage market in simple terms of decreasing rates and increasing demand ignores a key reality: Despite the low rates, banks have greatly raised their standards for home loan qualification.

"The common theme we're hearing is that consumers can't get a loan, even if they're putting 70% down," says economist Lance Roberts, CEO of Houston-based investment management firm StreetTalk Advisors. "And many homeowners are underwater and can't move, and that lack of mobility is tying up the market."

So if you're one of the lucky few with the credentials to get a loan at current rates (and you're not scared off by the prospect of home values dropping even further), should you go with an ARM or a fixed mortgage?

Roberts says that there's a strong possibility that mortgage rates will be significantly higher in five years, so unless you plan on moving within that period -- say, because you're in the military or another line of work that requires you to move frequently -- you're probably better off with long-term fixed-rate mortgages, which are also at historically low rates. And most importantly, he cautions those considering an ARM to make sure they can afford the payments they're committing to.

ARMs weren't the only loan product to get more attractive to consumers last month. Personal unsecured loans likewise hit a low, dropping 11 basis points to settle at 12.29%. Also, 48-month new auto loans hit their lowest rate since at least January 2007, dropping 13 basis points to 4.61%. Only 36-month home equity loans rose this month, seeing a bump of six basis points after hitting a low last month. The national average rate stands at 6.62% among banks included in the Credit Power Index calculation.

Deposits were a very different story. As has become customary, CD rates once again fell in June, with 12-month CDs slipping below 0.5% for the first time to settle at 0.48%. The next milestone to fall may be the 1% mark for 36-month CDs; as of the end of June that rate stood at 1.04%, down more than three percentage points since January 2007.

On the whole, the significant drop in loan rates outweighed the decline in deposits, making June another good month for the interest rate climate for American consumers according to the Credit Power Index.

"The Index continued its decline for the sixth straight month, though the decline appears to be slowing," confirms RateWatch general manger Rachelle Zorn. "During June it dropped by 18 basis points, slowing for the second straight month. It now sits at 22.51."

By comparison, the index had fallen by a combined 61 points in the preceding two months, so June's comparatively modest improvement suggests that the uptick in the consumer interest climate may not be as swift as anticipated. Regardless, it's encouraging to see interest rates continuing to go in the right direction for consumers -- or at least for those looking to borrow.

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