By Jeff Lazerson | email@example.com | MortgageGrader.com | April 18, 2021
The lowest point for 30-year fixed rates was 2.65% on Jan. 7.
Today, Freddie Mac’s survey shows the average 30-year fixed-rate at 3.04%.
Even though fixed rates have trended slightly lower in the past few weeks, that’s 39 whopping basis points higher than three short months ago.
Home prices continue to skyrocket. How can homebuyers and refinance candidates possibly keep pace with the lowest, most affordable fixed rates ever enjoyed?
Fannie Mae is offering a call to ARMS to keep payments as affordable as possible. Rates for adjustable-rate mortgages, or ARMS, might be running more than 1% lower than those for a 30-year fixed.
Specifically, these are 30-year mortgages with an option to lock in your interest rate for the first five, seven or 10 years.
Here is how it works.
After the initial lock period, mortgage rates are subject to rate changes calculated annually for the remainder of the 30-year mortgage contract. So, a 5/1 ARM would recalculate at the end of the 60thmonth, 72nd month, 84th month, etc. A 7/1 ARM would start recalculating after 84 months and the 10/1 ARM would recalculate after 120 months.
Out with the old scandal-driven London Interbank Offering Rate, or LIBOR, and in with the new Secured Overnight Financing Rate, or SOFR, which Fannie Mae, Freddie Mac and most mortgage lenders are now using.
For example, say you take a 5-year adjustable with a $500,000 loan with zero points with an initial interest rate of 1.75%. Your monthly principal and interest payment for the first five years would be a nominal $1,786. Assuming your make regular on-time payments and don’t pay any extra principal down, your remaining mortgage balance would be roughly $433,770 after the first five years.
The SOFR index currently is close to zero at 0.01%. Fannie Mae adds a profit margin to the index to arrive at your new rate. In this example, it’s a 3% profit margin.
Assuming the SOFR index rate stays at .01% five years from now, your interest rate in year six would be 3.01%. Your new principal and interest payment would be roughly $2,059, a $273 payment increase over the first five years.
Compare that to today’s $500,000, zero-point 30-year fixed mortgage at 2.875%. The monthly P & I for all 360 payments is roughly $2,074.
The fixed-rate mortgage payment is $288 higher for the first 60 months compared to the 1.75% start rate on the adjustable mortgage, saving $17,280 in total mortgage payments in the first five years. Not bad.
Compared to the zero-point 5-year conforming adjustable, the 1.75% starting rate for a 7-year adjustable Fannie Mae mortgage has a cost of roughly 0.75 of a point. The 10-year, 1.75% starting rate has a cost of roughly 1.75% points for well-qualified borrowers.
Fannie Mae high-balance loan amounts ($548,251 to $822,375) are slightly more expensive.
This financial instrument carries a 6% life-cap rate over the start rate. Assuming an initial interest rate of 1.75%, your rate can never go higher than 7.75%.
Compared to the certainty of a fixed rate, is the initial adjustable-rate-mortgage payment savings worth the uncertainty it carries if and when your rate moves higher?
It depends. If you see yourself moving up or moving out within the five, seven or 10 years, this is the affordable deal of the decade.
If this will cause you anxiety and sleepless nights awfulizing as to why you armed yourself instead of fixing yourself, don’t do it.
If you are somewhere in the middle, it would be a good idea to get the smartest person you know and trust to be your sounding board. Provide all of the what-ifs in the hopes of coming up with the best course of action for you and yours.
The lowest jumbo adjustable-rate-mortgages I could find for loans of $548,250 or more in the Inland Empire and over $822,375 in Los Angeles and Orange counties start at 2.375% on a 5/1, 2.5% on a 7/1, and 2.625% on a 10/1. This particular mortgage works off the Wall Street Prime Rate (currently 3.25%) with a 1.25% profit margin added per annual adjustment.
Freddie Mac rate news: The 30-year fixed-rate averaged 3.04%, 9 basis points lower than last week. The 15-year fixed-rate averaged 2.35%, 7 basis points lower than last week.
The Mortgage Bankers Association reported a 3.7% decrease in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed-rate on a conforming $548,250 loan, last year’s payment was $81 more than this week’s payment of $2,323.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with a 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 1.99%, a 30-year conventional at 2.625%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.125%, a 30-year conventional high-balance at 2.875% and a 30-year fixed jumbo at 3%.
Eye catcher loan of the week: A no-cost 30-year fixed-rate at 3%.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011