Fixed Rates on Florida Home Loans a Better Deal than ARMs

The bond market is squashing the dreams of home ownership for some Americans.

Those that could be in trouble due to the recent rise of short-term interet rates include: Home buyers who can only afford to buy homes with lower adjustable-rate mortgages (ARMs); those who can scrape into a house with more “exotic” loans with low teaser rates; and some investors contemplating second home purchases.

The problems with an adjustable Florida home loan

The ARM “was a creative and good product in the market that was utilized by a lot of savvy consumers and that’s been great. But having said that, an ARM is no longer really an attractive option for the new home shopper, especially in this inverted yield curve,” said Robert Foregger, chief strategy officer at EverBank, in Stowe, Vermont.

On Tuesday, two-year Treasury yields rose above 10-year yields, inverting the yield curve for the first time in five years. ARMs are pegged against the yields on shorter U.S. Treasury yields, and fixed-rate loans are set against longer Treasury yields. This spells problems ahead for those with any adjustable rates - expect bills to rise on your Florida home loan in the near future.

It now costs more for banks and lenders to borrow short-term, while earning less on longer-term loans they have on their books. If the curve inversion continues to grow, banks and loan officers will have to charge home buyers higher rates on ARMs than on fixed loans.

“As a borrower, you have nowhere to hide,” said Greg McBride, financial analyst at Bankrate.com.

Higher ARMs rates next year will further crimp housing demand, which has shown signs of fatigue in recent months. Inventories across Florida have been rising recently, while home sales have seen better days.

On Thursday, the National Association of Realtors reported that U.S. existing home sales fell 1.7 percent in November from October( to an annualized rate of 6.97 million units), its lowest level since March.

The growing gap between types of Florida home loan

The gap between fixed and adjustable-mortgage rates has been narrowing since June 2004, correlated with the shrinking yields between short- and long-dated debt during the Federal Reserve’s rate-raising campaign.

Interest rates on 5-year hybrid ARMs, one of the most popular, averaged 5.79 percent this week, up about 0.75 percentage point since the beginning of the year, according to Freddie Mac on Thursday.

Rates on 30-year fixed mortgages, which account for more than two-thirds of all U.S. mortgages outstanding, averaged 6.22 percent, up 0.50 percentage point at the start of the year, the company said.

Interest rates on exotic loans such as interest-only and negative amortization mortgages are much higher than a year ago. In the same case, they are barely lower than traditional and less risky 30-year fixed-rate mortgages, analysts said.

“Interest-only and option payment loans had been ways to afford homes in expensive markets,” said Amy Crews Cutts, deputy chief economist at Freddie Mac. “Now even, these products will no longer be attractive. That will impact affordability.”

ARMs have allowed more people, including risky borrowers with spotty credit histories, to buy homes for the first time.

Interest rates on ARMs had been much lower than traditional fixed-rate loans, as they allowed home buyers to make smaller monthly payments than those on fixed-rate loans. This is why they were attractive options for those with a poor credit score - there was less risk involved for all parties involved.

While ARMs have been instrumental in expanding home ownership, their rapid growth in recent years worried regulators because speculators have used the more exotic types of ARMs to buy and quickly sell properties, especially condominiums.

“I think people who were trying to get into investment properties and trying to flip them won’t see those financial advantages with the short-term rates being higher than the long-term rates,” said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York.

Higher short-term borrowing costs will not cause a housing crash and push the United States into a recession, as some naysayers have feared. In fact, a curve inversion may be a good opportunity for current ARMs holders to lock in lower long-term fixed loans, industry experts said.

The best conclusion to draw is that it’s far from time to panic, but merely to assess your Florida home loan as it currently stands.