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Adjustable-Rate Mortgages No Longer a Bargain?

Even though ARMs may not be a great bargain right now, borrowers are still wondering if they can save with them.

WASHINGTON – When the Federal Reserve began aggressively increasing interest rates last year, home buyers turned to adjustable-rate mortgages (ARMs) hoping to lower their mortgage costs. Now, they aren’t saving much money at all, and, in some cases, they are paying more.

ARM interest rates were still significantly lower than fixed-rate mortgages throughout 2022, when the central bank first started raising rates. The 30-year fixed mortgage rates tend to rise and fall along with longer-term rates. The initial rates on ARMs tend to track shorter-term rates.

The Federal Reserve lifted short-term rates so much that they became higher than long-term rates, making it harder for lenders to keep offering attractive rates on ARMs. The dynamic has not changed much since the Fed signaled this month that it is likely done raising rates because inflation is coming down. Since then, long-term rates have fallen.

If the Fed starts cutting rates, short-term rates could drop back below long-term rates, reintroducing an ARM benefit, said Barry Habib, chief executive of mortgage-software company Highway.

The lowest ARM rates are typically reserved for affluent buyers with strong credit. Banks that issue the ARMs often keep the loans on their balance sheets, allowing them more flexibility to adjust the initial rate. They might offer the below-market rates to lure the customers' other business, such as investments and deposits. In the first nine months of 2023, all of the 10 largest producers of ARMs were banks or credit unions.

Source: Wall Street Journal (12/26/23) Eisen, Ben

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