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Your
best mortgage move now: Lock in a fixed rate
By Greg
McBride • Bankrate.com
The economic outlook this week
is one of guarded optimism. More people are expressing the sentiment
that the economy is still plodding forward, albeit at a slower pace,
and is not on the brink of recession.
Although earnings season is still
young, that optimism has surfaced in the equity market, and the
predictable selling of longer-term Treasuries has pushed the yield
on 10-year notes above 5 percent.
These forces have pushed fixed mortgage rates
to their highest point since February, with the likelihood of still
higher rates. At the same time, rates on adjustable mortgages have
continued to decline and are now the lowest since August 1999.
However, locking in a fixed-rate mortgage now,
rather than pursuing an adjustable mortgage as rates decline, is
the way to assure affordable monthly payments now and into the future.
 The
spread between rates on adjustable and fixed mortgages has widened
since the beginning of the year, but still remains much more narrow
than the typical spread seen in recent years, including the last
refinance boom in late 1998 and early 1999.
The current spread between the average 30-year
fixed mortgage and one-year ARM is about 80 basis points (0.80 percent),
up from 15 to 20 basis points in December and January, but about
half the average of the last five years. Spreads were even wider
prior to 1996.
What does this mean?
Unless the home you're buying is a "starter"
home or you don't expect to stay in a home longer than five to seven
years, look to lock in a fixed-rate mortgage. This takes advantage
of current low rates and removes the uncertainty of what future
rates and payments will be when the loan becomes adjustable.
In short, the narrow spread is not enough to
compensate the homeowner for the possibility of higher rates in
future years.
For those figuring to move again in the next
several years, consider a hybrid ARM product such as a 3/1, 5/1,
or 7/1 ARM. These loans have rates that are fixed for the initial
period of years -- three years on a 3/1 ARM, for example -- becoming
adjustable thereafter. Rates tend to be lower than those of fixed-rate
mortgages, but get higher as the initial fixed time frame lengthens.
The trick is to select a term that meshes with the period one figures
to be in the home, so the loan functions as a fixed-rate loan while
you're there. By the time the loan will become adjustable, the homeowner
will have already moved on. For this reason, a 5/1 or 7/1 ARM is
often a safer bet.
Despite the outlook for rising mortgage rates
as the economy rebounds, fixed-rate mortgages still provide a level
of value relative to adjustable-rate mortgages -- not to mention
protection from higher rates and higher payments in future years.
Greg McBride is a financial analyst
for Bankrate.com.
For advice regarding your specific
situation, please e-mail one of Bankrate.com's
Q&A experts or visit the Personal Finance Advice channel on Bankrate.com.
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