Interest rates are on the rise and many homeowners who have adjustable rate mortgages (ARMs) may see increases in their forthcoming annual adjustments.
Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides a few percentages above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve's after-meeting statements.
In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.
Our current market reflects the reaction of investors reading between the lines on comments made by the Federal Reserve, and mortgage interest rates going up. This will have an affect on homeowners with ARMs tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.
This doesn't mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower's fixed margin plus the current rate of the index the mortgage is tied to.
Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there's a good chance the borrower may now qualify for a loan with a lower interest rate.
As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower's long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.
Dick Kump is the Broker/Owner of United States Mortgage located in Carlsbad and a Licensed Broker, CADRE#01265444 Department of Real Estate. Free consultation and a 10-Year History of ARM Indexes are available by calling 800-270-8694 or visiting www.UnitedStatesMortgage.US.
Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides a few percentages above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve's after-meeting statements.
In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.
Our current market reflects the reaction of investors reading between the lines on comments made by the Federal Reserve, and mortgage interest rates going up. This will have an affect on homeowners with ARMs tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.
This doesn't mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower's fixed margin plus the current rate of the index the mortgage is tied to.
Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there's a good chance the borrower may now qualify for a loan with a lower interest rate.
As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower's long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.
Dick Kump is the Broker/Owner of United States Mortgage located in Carlsbad and a Licensed Broker, CADRE#01265444 Department of Real Estate. Free consultation and a 10-Year History of ARM Indexes are available by calling 800-270-8694 or visiting www.UnitedStatesMortgage.US.