No matter what type of real-estate
move you may be considering, financing is a key issue.
Whether it's buying a new home, selling the one you
have, refinancing, consolidating debt using the equity
in your home, or paying for home improvements, where
and how to borrow the money is a prime factor.
And a major part
of the financing question is the interest rate.
With this in mind,
what is the outlook for mortgage and home equity rates
have a choice of a multitude of different products,
but they often fall under one of two broad categories
-- fixed rate or adjustable rate. Fixed mortgage rates
and adjustable-rate mortgages, or ARMs, often move independently
of one another, and plenty of evidence of that has been
seen in recent years.
rates are sensitive to the short-term interest rate
target set by the Federal Reserve, fixed mortgage rates
are closely related to yields on long-term government
bonds. Longer-term economic prospects, for inflation
in particular, and demand for U.S. bonds among overseas
investors play the key roles in the movement of fixed
Although fixed mortgage rates have moved higher from
the sub-6 percent levels that were so prevalent from
2003 to 2005, rates are still low and conducive to home
buying. The average 30-year fixed rate mortgage that
is currently at 6.34 percent is likely to rise into
the upper 6s in the second half of 2006. This is well
below the average over the past 20 years of 8 percent.
But rates will be very close to the average of the past
10 years of 6.9 percent and will be higher than anything
seen in the past four years.
The average 30-year fixed-rate mortgage
has been below 6.5 percent every week since July 2002.
Although rates are still low for home buyers, the majority
of refinance activity will involve borrowers moving
out of adjustable-rate mortgages, referred to as "dis-ARMing."
Home buyers are currently favoring fixed-rate
mortgages over adjustable-rate mortgages because the
difference in initial rates is so slim. The current
30-year fixed rate averages 6.34 percent, while a 5/1
ARM is 6.08 percent and a 1-year ARM is 5.73 percent.
As a borrower, why bear the risk of higher rates in
the future without a substantive reward in the form
of a lower rate?
How high those adjustable rates and monthly mortgage
payments eventually go is dependent on how high the
Federal Reserve raises short-term interest rates. Despite
the changeover from Alan Greenspan to Ben Bernanke as
head of the Fed, the focus on containing inflation will
remain the primary objective. In other words, the Fed
isn't done raising interest rates yet and chances are
they will lean toward raising rates to contain inflation
rather than holding rates down to foster economic growth.
This is news that both current homeowners with adjustable-rate
mortgages and new buyers considering ARMs will want
to consider during the loan process.