Missed that 3.5% mortgage rate? That's OK, there is always the 5/1 ARM

In the past two days the 30-year conventional mortgage rate broke above 4.5% - roughly a 2-year high. Many economists argue that in spite of this spike, we are still some two percent below the pre-recession rates. Of course the economy (including availability of credit and employment) was arguably stronger before the recession than it is now. And it's not necessarily the level but the speed of the spike that worries some:  over 120 bp rate hike in less than two months.

There is another dynamic taking place in the mortgage universe. The treasury yield curve has steepened (see post), resulting in the adjustable rate mortgage (ARM) rates lagging the 15 and the 30Yr rates quite dramatically (30Yr to 5/1 ARM spread went from some 40bp to 150bp).

Source: Mortgage News Daily

Now apparently a growing number of homebuyers who are nearing a house purchase are turning to mortgages with teaser rates as well as to 5yr ARMs. Having become accustomed to mortgage rates declining for years, many have been waiting for rates to turn around and now want that last month's mortgage rate. And often the only way to get there on the monthly payments is to shift down the yield curve. This is a bit alarming because in 5 years rates could spike further and these borrowers would be in trouble.

CNBC: - "Funny, people are rushing into higher-risk loans to save deals as rates spike. What happens in five years when their rate starts adjusting upward 2 percent per year? They blow up!" said Mark Hanson, a California-based mortgage and housing analyst.

Of course in 3-5 years they will be able to flip that house. Sounds familiar?

SoberLook.com

From our sponsor: