Banks already face a tough environment due to interest rates. Banks make money by borrowing lower short-term rates and lending at higher longer-term rates. But as the Fed raised short rates over the past two years while long rates held steady, banks’ profit margins have been squeezed. What is this going to do to your adjustable rate loan?

Rates are still low. Very low! Over the past 6 months, the spread between the adjustable rate and the fixed rate has been slowly closing. The 30 year mortgage rates are based on (among heavier factors) the 10 year bond yield. The shorter term adjustable rates are based on (among heavier but shorter term factors) are based on the short term bond yields. The short term yields are creeping higher and faster than the long term yields.
In other words, the 10/1 7/1 5/1 3/1 ARM’s are almost the same as the 30 year fixed rate. So, why and when would you take an adjustable rate mortgage over a fixed rate mortgage? Only when it makes pure and good sense, not on a maybe.
Below are 3 reasons to take an adjustable rate mortgage:

• The loan amount is so large that the difference on the rate can save me hundreds of dollars a month.
• I am selling the house for sure within the time before the rate changes and the savings in that short term warrants taking the rate.
• I cannot think of another reason….

3 reasons not to take an adjustable rate instead of a fixed rate:

• I think i might move in a few years
• I can save 50 bucks.
• the loan officer is talking me into it (so he can refinance my loan in 3 years)

I have been swaying clients away from the adjustable rate loan for the past few years. Two years ago the sread between the 30 year fixed and the 5/1 arm could have been around 1 to 3/4 of a percentage point. Now they are too close. So, other than saving hundreds a month and you are definately selling this home. -do your math and go FIXED!!