Monday, February 11, 2008

Diverging Jumbo Rates, should you take an ARM?

Jumbo Mortgage rates are highly sensitive to expectations for the U.S. economy.
When the economy is expected to sag, mortgage rates tend to fall
When the economy is expected to surge, mortgage rates tend to rise

Currently, the economy is expected to sag and surge in the later half of the year. I disagree but what live with what the market gives us. This is why adjustable-rate jumbo loan mortgage rates are holding their ground as fixed-rate jumbo mortgage rates increase.
Fixed-rate and adjustable-rate mortgages are not as interchangeable as in the past and it's mostly because the Federal Reserve's routine has created expectations of runaway inflation later this year.
The "Fool in the Shower" bit goes like this:
A fool gets in the shower and it's freezing cold
To get warm, he flips the hot water on to full blast
Before long, the water goes way past warm and into hot. It burns him.
The fool turns the water back to cold and repeats the process in reverse.
The Federal Reserve is following the same pattern. The economy showed signs of weakness (i.e. being cold) last year so the Fed took steps to warm it up. Since September 2007, the Federal Reserve has shaved 2.25% from the Fed Funds Rate. With each successive cut, though, the Fed is turning the proverbial water farther towards "hot". This makes it more likely that the economy will go from "ice cold" to "scalding hot" sometime later this year.

Overheated means inflation comes back and now investors are taking notice and a quarter of all jumbo mortgage loans are owned by foreign investors and they don't like our falling dollar.
The growing likelihood of inflation is now priced into longer-term mortgage rates. Inflation erodes the value of mortgage bonds so it's causing long-term mortgage rates to rise.
Meanwhile, short-term rates are still reflecting the short-term economic weakness to which the Fed is responding. In the near-term, the absence of inflation is holding rates low for a host of products, including:
The 1-year ARM
The 3-year ARM
The 5-year ARM
And that's where it ends. There is a increase right at the 7-year marker. The 7-year ARM along with the 10-year ARM and the fixed products are all priced for the Fool in the Shower bit, jacked higher for inflation and the eroded dollar. Of every client is different, you should match your time frame for the home with your mortgage as best as possible. With all the consumer choice comes enormous responsibility.
Two months ago, the spread between a fixed-rate mortgage and a shorter-term adjustable-rate mortgage was .125%. Today, the gap is 0.625%. We are currently advising clients to consider the 5Y and the 10Y jumbo loan interest only. We often advise to go interest only and max out all retirement accounts with the funds otherwise allocated to the mortgage principal. For a customized proposal from a banker contact us anytime.