Recently the bond market in the United States went topsy-turvy with a movement that will cost homeowners with adjustable rate mortgages a lot of money. The condition is called an inverted yield curve, and it could drive mortgage payments higher for as many as one third of Americas homeowners.
This phenomenon in the bond market follows a rash of interest rate increases by the government. As a result of these rate hikes it will cost homeowners more to refinance their mortgages. The inversion in the bond market may have been caused by a lack of investors during the holiday season. This coupled with inflationary concerns and the possibility of a recession in 2006 may have contributed to the condition, which hasnt occured in the last five years.
Under normal market conditions, long term interest rates are higher than their short term counterparts. The reason for this is simple; lenders expect a higher return when they loan their money for a longer period of time. When the inversion occurs short term rates rise above long term interest rates creating an imbalance in the marketplace. The interest rate you pay on an adjustable rate mortgage is tied to these short term interest rates.
This condition coupled with recent rate hikes has significantly reduced the demand for adjustable rate mortgage loans. This happens when the savings of an adjustable rate loan over a traditional 30 year fixed loan shrink to the point where adjustable rate mortgages lose their luster.
For example if you were to purchase a $200,000 home with a traditional 30 year mortgage at 6.25%, your payments would be approximately $1,230 a month. The same home with an adjustable rate mortgage would yield a payment of $1,165 at 5.75%. The adjustable rate mortgage loan is a savvy method for purchasing a home as long as you stay on top of interest rates. When the interest rates begin to rise as they have been coupled with current market conditions, you could see your monthly payment skyrocket.
Many analysts believe the outlook for 2006 is not good; short term interest rates are likely to continue their stair-stepper increases. This is not good for mortgage interest rates especially if you financed your home using one of the riskier flavors of adjustable rate mortgages. These risky varieties include interest only and option adjustable rate mortgage loans. The risky loans allow many homeowners to purchase more home than they could normally afford, often ending in foreclosure.
If you are a homeowner with an adjustable rate mortgage loan you should consider refinancing now before your payments become a problem. To save money when refinancing your home you need to do your homework first and shop around for the best deal. If you dont have time to do the legwork yourself a good mortgage broker can often find you an excellent deal.
Louie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgage Refinance Advisor, a mortgage resource site devoted to saving homeowners money with a free guidebook “Five Things You Need to Know Before Refinancing a Mortgage.” http://www.refiadvisor.com
