Best financial moves to make: Mortgages

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Here’s how the Fed’s latest announcement will affect mortgage rates.

Fixed-rate mortgages:
Rates for 15- and 30-year mortgages have climbed by more than a percentage point since the last Federal Open Market Committee meeting, on June 25, when the Fed cut short-term interest rates by a quarter of a percentage point.

That brings up the question of why a short-term rate cut would be followed by an increase in long-term rates. Experts believe that the June 25 rate cut came as a surprise to the mortgage market, where investors had convinced themselves that the Fed would reduce short-term rates by half a point. When the rate reduction was smaller than expected, long-term mortgage rates went up.

The quarter-point rate reduction was like the first stage of a rocket. Three weeks later, Fed chairman Alan Greenspan ignited the second stage by implying to Congress that the Fed wouldn’t keep long-term rates artificially low by buying Treasury notes.

This time there were no surprises. No one seriously thought the Fed would adjust short-term rates.

In’s weekly index of mortgage rates offered by large lenders, the average 30-year rate was 6.43 percent Aug. 6. The average 15-year rate was 5.78 percent.

Best move now:
Long-term rates have been rising for six weeks. Occasionally they might dip for a week or more, but rates unmistakably are on the rise overall. If a rate dips for a day or two, and you find that rate acceptable, go ahead and lock. Sure, you missed the lowest rates in a generation in mid-June. Console yourself by realizing that any rate below 7 percent is low by historical standards.

Try the mortgage rate search to locate the best deal.

Adjustable-rate mortgages:
Usually, ARM rates tend to follow changes in short-term rates, such as the yields on short-term Treasury bills and notes. That hasn’t been the case lately, as yields on shorter-term Treasuries have risen along with yields on longer-term Treasuries. As a result, rates on one-year adjustables have gone up. In’s weekly index of mortgage rates offered by large lenders, the average one-year ARM was 4.10 percent Aug. 6; it was 3.71 percent on June 25, the date of the most recent Fed meeting.

Best move now:
Because long-term rates are rising, ARMs have increased in popularity. You definitely should consider an ARM if you plan to live in the house for five years or less. You can get a “hybrid ARM” — one with a lower initial rate that lasts for three, five, seven or 10 years, then adjusts annually thereafter.

If you plan to live in the house for a long time, you might be better off getting a fixed-rate mortgage, especially if you’re a middle-class person whose earnings come from wages or a salary. People who have a lot of investment income might find ARMs to be appropriate, even if they plan to occupy the house for a long time, because they can better handle the risk of rising rates.

Search for the best ARM rates in your area.