Mortgage Loan

Why Fixed Rate Mortgages are strong and ARMs are weak

by Broderick Perkins

(4/5/2012) ERATE Exclusive - It's no surprise home buyers and refinancing home owners are flocking to the fixed rate mortgage counter.

Anyone who's been through the last recession with or without a home, is sick of economic uncertainty and just want a little security in their financial life.

The Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending March 30, found among home purchase applications, 85.8 percent were for 30-year fixed rate mortgages, 6.6 percent for 15-year fixed rate mortgages and only 5.9 percent for adjustable rate mortgages (ARMs.) "Other" fixed-rate mortgages with amortization schedules other than 15 and 30-year terms was 1.7 percent of all purchase applications.

In addition to economic uncertainty, the large share of fixed rate mortgages stems from buyers being certain that today's record low interest rates, along with cut-rate priced homes, won't be around for ever and they'd like to hold onto a little piece of that history.

Record low interest rates are your friends

The week ending April 5, Freddie Mac reported the average interest rate on 30-year fixed rate mortgages was 3.98 percent, down from 3.99 percent last week.

The average rate on the 15-year fixed rate mortgage dropped from 3.3 percent to 3.21 percent, during the same period.

The Santa Clara, CA-based "ERATE Interest Rate Update," for the week ending April 3, found rates on 30-year fixed rate mortgages as low as was 3.42 percent, 2.80 percent for 15-year fixed rate mortgages.

With a fixed rate mortgage, you've got a fully amortizing loan with an interest rate and payment that remain fixed for the term of the loan. You can budget the cost. Even if inflation surges, another war breaks out or the Euro Zone melts down, there won't be any surprises on your mortgage statement.

ARMs are even cheaper and exceedingly attractive, but are better suited for those who don't plan on staying in the same home much longer than the first adjustment period - one, five, seven or 10 years. Once an ARM begins to adjust in a booming economy, economic growth will become a double-edged sword. Along with prosperity and greater confidence in the economy, you could choke on a larger ARM payment.

Certainly, if you aren't going to be in the home for much longer than an ARMs first adjustment period, you can add an ARM to your mortgage shopping considerations and hedge your bets.

Interest rates could turn on you

However, with nearly 86 percent of buyers going for fixed rate mortgages, the consensus is pretty clear. Consumers are not very confident about the economy and the last bust gave them their fill of ARMs.

They are playing it safe for good reason.

The mortgage association, along with other market monitors are projecting rates could move higher later this year, up to an average of 5 percent on 30-year fixed rates mortgages.

Recent jumps in yields on 10-year Treasury notes gets some of the blame, economists say. Rates typically track the 10-year Treasury.

With the economy gearing up for growth, former Treasury investors are bailing the safe haven to try their luck in Wall Street's riskier, but recently robust stock market holdings.

Also, the Federal Reserve's "Operation Twist" temporarily pushed down long-term interest rates, but it ends in June and that could threaten low rates.

Shop around for the best rate in a fixed rate mortgage or ARM, but do it quick.

Refinance at Today's Low Rates!

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