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Mortgage Rate ReportTuesday, October 24, 2017
Mortgage rates continue to resist gravity as well as the Federal Reserve's actions and remained stable for another week. Although the Federal Reserve left interest rates unchanged at its September meeting, its move to start trimming its balance sheet by selling U.S. treasuries and mortgage-backed securities as well as its signaling of a rate hike before the end of the year pushed mortgage rates moderately higher across the board in mid-September. Following this initial uptick, however, mortgage rates have been relatively steady for over a month. Mortgage rate stability continued this week despite the Federal Reserve releasing the minutes from its September meeting last week that all but guaranteed an interest rate hike before the end of the year.
In its September statement, the Fed highlighted labor market strength, improving household spending and growing business investment as offsets to moderate inflation in deciding to keep the federal funds rate unchanged. Although the Fed kept the federal funds rate steady at 1.000% to 1.250%, the decision to start its previously announced balance sheet shrinking program in October moved treasury yields higher and mortgage rates followed suit, with most programs experiencing a 0.125% increase in rates.
The minutes from the September meeting, released last week, show that Fed members continue to debate the impact of low inflation on the economy as well as the projected trajectory of inflation in the future. While some Fed board members pointed to low inflation as a reason to leave rates unchanged, others focused on projected inflation growth and multiple positive economic factors to support a near term interest rate hike. The more aggressive perspective seems to have won the debate and we are poised for the Fed to raise rates in December, as many industry analysts have predicted.
Fortunately for borrowers, mortgage rates have been relatively unresponsive to the Fed's intentions and were steady for another week. The interest rate for a 30 year fixed rate mortgage remained unchanged at 3.750% while the interest rate for a 15 year mortgage held at 3.000%. The interest rate on a 5/1 adjustable rate mortgage (ARM) stayed put at 3.000%, remaining attractive to borrowers seeking shorter-term mortgage programs willing to take on the risk of an ARM. FHA mortgage rates were flat at 3.250%, matching VA mortgage rates which also remained at 3.250%, with both programs appealing to home buyers focused on low or no down payment loan options. Keeping with the broader market trend, non-owner occupied mortgage rates remained at 4.000%. Bucking the trend in a positive direction, jumbo mortgage rates dipped 0.125% to 3.750%.
Although the Fed did not change rates, its economic outlook or forecast for future rate hikes in its September meeting, its actions and signals increased market uncertainty which usually leads to higher mortgage rates. Four weeks of relatively stable mortgage rates have returned a sense of calm to the mortgage market and interest rates remain near historical lows. With the Fed meeting minutes reinforcing the expectation for a rate hike expected before year end as well as three more anticipated hikes in 2018, prospective borrowers looking to buy a home or refinance their mortgage may be able to lock in a lower interest rate by acting sooner rather than later, before mortgage rates rise again, potentially at an accelerated pace.
Because mortgage rates change daily, we continue to actively monitor the mortgage market for changes. Borrowers should check the FREEandCLEAR mortgage rate tables regularly to review customized, updated mortgage rates for lenders in their area. Our rate tables are free to use and require no personal information.
Why Select an Adjustable Rate Mortgage (ARM)
Lower Initial Rate.
The initial interest rate for an ARM is typically lower than the interest rate on a 30 year fixed rate mortgage. Borrowers benefit from the lower interest rate, sometimes called a “teaser” rate, for the first 3, 5, 7 or 10 years of the loan, depending on what type of ARM you select. After this initial period, which is also called the fixed rate period, the interest rate is subject to change and possibly increase. Borrowers who know they are only going to own their home for a set period of time are able to take advantage of the lower interest rate afforded by an ARM, without being exposed to the risk that their interest rate increases in the future.
Lower Monthly Payment.
A lower interest rate means a lower monthly payment for borrowers. A lower monthly mortgage payment provides additional financial flexibility for borrowers and makes owning a home more affordable, at least during the initial fixed rate period of the loan. The flip side of an adjustable rate mortgage is that your monthly payment can potentially increase in the future if interest rates go up. Borrowers need to make sure that they can afford their monthly payment both at the beginning of the mortgage, when the interest rate is lower, and over time if their payment goes up.
Larger Mortgage Amount.
The lower teaser interest rate and monthly payment enable borrowers to afford a larger mortgage amount and potentially buy more home. Being able to qualify for a larger mortgage amount is one of the main attractions of an adjustable rate mortgage. The downside of being able to afford a larger loan amount with an adjustable rate mortgage is that you lose the certainty that comes with a fixed rate mortgage, where the interest rate remains the same over the life of the mortgage.
You Think Interest Rates Will Go Down.
The interest rate for an adjustable rate mortgage is subject to change after a fixed period of time, usually the first 3, 5, 7 or 10 years of the mortgage. The period of the loan when the interest rate can change is called the adjustable rate period and lasts until the end of the loan term, which is usually 30 years. If you think interest rates will decline in the future then an adjustable rate mortgage may be a good option. Because if interest rates go down during the adjustable rate period of your loan, your monthly payment will decrease which is great for borrowers. Please note that predicting interest rates is highly challenging so this approach can expose you to significant risk.
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More FREEandCLEAR Mortgage Resources
Use our Adjustable Rate Mortgage Calculator to calculate the initial monthly payment and worst case scenario for an ARM based on today’s interest rates
Understand the ins and outs of an adjustable rate mortgage (ARM) including key loan terminology and how they work
Adjustable rate mortgages involve more risk than other types of mortgages. Be sure to understand the downsides of an ARM so you can make an informed decision when you select your mortgage
Got a question about an adjustable rate mortgage (or any mortgage topic)? Ask the FREEandCLEAR Mortgage Expert and receive an informative response within 24 hours