Adjustable mortgages may see a 3.5% rate increase by 2025

The days of cheap and easy money will soon be history as the Federal Reserve starts raising short-term rates.

By Jeff Lazerson | | | February 01, 2022

Buckle up.

If you have an adjustable-rate-mortgage of any vintage – adjustable monthly, semi-annually, annually or even three to five years — put your mortgage servicer on speed dial.

You will need to confirm when your payment is in play and how high your new mortgage rate and payment will be.

On Wednesday, Jan. 26, Federal Reserve Chairman Jerome Powell left no doubt the days of cheap and easy money — that is, the zero percent Fed funds rate — will be history by March. The Fed is going to raise short-term rates.

The Fed’s inflation rate is targeted at 2%.

One day after the Fed announcement, we learned the economy super-exploded in the fourth quarter of 2021 with the gross domestic product expanding at an annualized rate of 6.9%, according to the U.S. Bureau of Economic Analysis.

Math wizards will point out the inflation rate is now 4.9% higher than the target Powell wants. It’s time to put the COVID-19 inflation genie back in the bottle. Hard work ahead.

What does that mean for adjustable mortgage rates, which are closely tied to the cost of funds? Up, up and away.

We can see short-term borrowing costs increase from zero to as much as 3% to 3.5% by 2025, according to Mark Vitner, senior economist at Wells Fargo.

“Financial market thinking is (there will be) four one-quarter-point rate hikes this year with three one-quarter-point hikes in 2023 and three one-quarter-point hikes in 2024,” said Vitner. “It takes a long time for monetary policy to make it through the economy.”

Today, most mortgages are tied to the Secured Overnight Financing Rate, or SOFR. SOFR is based on overnight bank borrowing costs collateralized by the U.S. Treasury securities market.

As of Wednesday, the index sat at 1.04%, according to the New York Fed chart. Lenders may use the SOFR 30-day average of 0.049, for example, to calculate your rate, then add a profit margin of about 2.75 to recalculate your mortgage rate.

First and second mortgages total about $11.5 trillion in the U.S., of which about $1.1 trillion, or 10%, were adjustable-rate first mortgages, according to Mark Zandi, chief economist at Moody’s Analytics.

Second-lien homeowner lines of credit, or HELOC’s, total $300 billion, and fixed-rate seconds total $140 billion.

Today, most adjustable-rate mortgages are similarly priced to fixed-rate loans. Therefore, there is no reason to apply for an ARM since the rate is likely to increase once the rate reboot starts.

I see two exceptions though. First, a 30-year or 40-year mortgage offering an interest-only payment for the first 10 years. It’s a great hedge against inflation even though you are not initially paying down principal. And it increases affordability.

“Today’s adjustables are not the exploding subprime ARMS circa 2006-2007,” said Zandi.

For example, your interest-only payment on a $1 million loan at 3.375% is $2,812. A fully amortized 30-year fixed at 3.5% would offer a principal and interest payment of $4,490. That’s a big, bad $1,678 payment difference during the first 10 years.

Yes, if you keep the mortgage for more than ten years and you never paid toward principal, you just bought yourself a 20-year amortizing loan with a rate potentially going to 9.375%. Or you can do the safer 40-year schedule with 30 years remaining, but with a 0.125% higher start rate.

The other adjustable mortgage I’d consider would be a 30-year ARM that’s interest-only for the first 10 years. You can also get such a loan at 3.25% for your elderly parents or disabled adult child. This might be a much better option than a reverse mortgage for example.

As for HELOC’s, most are calculated by combining the Wall Street prime rate (currently at 3.25%) with a margin. For example, prime plus a 1% margin translates into a rate of 4.25%.

Prime rate tends to move in tandem with the Fed funds rate. So soon enough, your HELOC might be in the 6% to 7% range.

Zandi sees lenders getting more creative with mortgage products as rates rise and affordability declines.

Freddie Mac rate news: The 30-year fixed rate averaged 3.55%, down 1 basis point from last week. The 15-year fixed rate averaged 2.8%, up 1 basis point from last week.

The Mortgage Bankers Association reported a 7.1% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $289 less than last week’s payment of $2,924.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 3%, a 15-year conventional at 2.75%, a 30-year conventional at 3.5%, a 15-year conventional high-balance ($647,201 to $970,800) at 3.125%, a 30-year conventional high-balance at 3.625% and a 30-year fixed jumbo at 3.5%.

Eye catcher loan of the week: A 30-year ARM without costs that’s interest-only for the first 10 years with a 3.625% start rate.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or His website is

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011