On Saturday, I mentioned that 30-year mortgage rates had reached their highest point since May of last year. It’s true. Last week, Freddie Mac reported that the average rate for a 30-year fixed loan (FRM) jumped to 3.81%. That was the highest benchmark since May 10, 2012, when it averaged 3.83%. The 15-year FRM also reached its highest point in recent months.
This comes after months of stability within the mortgage markets. Is change in the air?
Frank Nothaft, Freddie Mac’s chief economist, attributes this rise to improving economic conditions and the eventual end of the Federal Reserve’s quantitative easing program, or QE.
Since January 2013, the Fed has been buying about $85 billion worth of mortgage-backed securities (MBS) per month, as part of their round-three QE program. This and other measures taken by the central bank have helped keep mortgage rates low in recent months.
The 1-year adjustable-rate mortgage (ARM) loan is a different story. It bucked the upward trend last week by actually dropping one basis point from the previous week’s average. We have seen considerable stability with this particular product, over the last year or so. This is good news, but only for the small percentage of borrowers who actually use the 1-year ARM to buy a home.
1-Year Adjustable Mortgage Rates Holding Steady
Are you in the market for a 1-year ARM loan? If so, you’ll be happy to know that mortgage rates within this category have been less volatile in recent weeks, compared to the benchmark 30-year fixed.
Over the last four weeks, the average rate for a 30-year FRM has risen steadily from 3.35% to 3.81% — a gain of 46 basis points. In contrast, the average mortgage rate for a 1-year ARM loan dropped by two basis points over the same four-week period. Meanwhile, the industry-wide average for a 5/1 hybrid ARM rose from 2.58% to 2.66%.
Here is a recap of recent trends:
- On May 30, the average rate for a 1-year Treasury-indexed ARM dropped two basis points to 2.54%.
- Average rates in the 1-year category have hovered between 2.5% and 2.6% since the beginning of this year.
- The short-term ARM rates reported on May 30, 2013 were actually lower than the same time last year.
Freddie Mac published the chart below on May 30, 2013. The purple line fluctuating along the bottom represents average mortgage rates in the 1-year ARM category, starting in May of 2012 (left side) and running through May of this year (right side).
As you can see, the current average for the 1-year adjustable product is lower than it was a year ago, while the 30-year FRM is higher. The 5/1 ARM loan is also averaging lower today than the same time last year.
Note the difference in stability between the fixed and adjustable products, over the last few weeks. If I was in the market for a fixed-rate mortgage, I’d be inclined to move sooner rather than later.
How Does a 1-Year ARM Loan Work?
The 1-year ARM is one of several adjustable-rate mortgage products. It’s also one of the most rarely used. The 5/1 ARM is the most popular product among the variable loans, because it offers a 5-year period where the rate is fixed.
So what is a 1-year ARM, and how does it work? Here’s a quick primer.
The interest rate on an adjustable mortgage changes every year. In the case of a 1-year ARM, the rate will adjust or ‘reset’ once per year. That’s what the ‘1’ indicates within the title. As a result of these changes, the borrower’s monthly payments will also vary from one annual adjustment to the next. So there is a good deal of uncertainty with these mortgage products.
The rate essentially floats at a certain margin above a specified index. Think of the index as the baseline, and the margin as a markup above that baseline. Lenders use a variety of indexes when assigning ARM rates. The most common indexes are the 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).
The 1-year adjustable mortgage rates reported by Freddie Mac, shown above, are based on the Treasury index.