WeeklyBasis 05/31/05: Cheap Money Abounds, Call Your Mortgage Broker First

Rates/Commentary, week of May 31, 2005. 30-yr rates are the same and ARMs are down .125% from last week. The 10-year Treasury yield, an important benchmark for mortgage rates, is hovering near a 2005 low point of 4%. The Fed’s rate hikes over the past year were designed to gently bring all benchmark rates (Treasuries included) up to levels that would slow the supply of cheap money and keep prices the economy (including housing prices) from rising too quickly. But open market trading of Treasuries has been out-weighing Fed price-setting. This is good for rates and good for homebuyers. But borrowers shouldn’t expect rates to go any lower. Given the unusually large spread between Fed Funds and Treasuries, it’s unrealistic to expect the Treasury yield to go much below 3.85%. Also, you’ve surely seen more and more press articles about the risks of interest-only loans. Interestingly, most of these stories don’t discuss basic provisions of interest-only loans like the option to pay extra principal at any time; and the importance of matching an ARM term to expected time in the home (e.g., if a buyer plans to stay in a home for 7 to 10 years, then they should get a 7 to 10 year ARM so that they are out before it starts adjusting). The main point is that leverage provided by interest-only loans can help a buyer to win a competitive bid, but the right advice from a broker can prevent them from getting into trouble with too much leverage.

Conforming ($200,000 – $359,650) – NO POINTS
30 Year: 5.5% (5.64% APR)
15 Year: 5.125% (5.265% APR)
5/1 ARM: 5.25% (5.40% APR)

Jumbo ($359,651 – $650,000) – NO POINTS
30 Year: 5.875% (6.015% APR)
15 Year: 5.375% (5.515% APR)
5/1 ARM: 5.25% (5.40% APR)