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People often assume that because adjustable-rate mortgages "share risk" between mortgage lender and mortgage lendee, they will be rewarded with a lower mortgage rate than if they chose a comparable fixed-rate mortgage.

The chart at right proves that thinking false.

Three separate times since mid-September, 5-year ARMs priced worse than a similar 30-year, fixed rate mortgage.  It's atypical, but it does happen from time to time.

And it's also why locking mortgage rates is like running a Peyton Manning offense -- you can't call a play until you've stepped to the line and studied what's on the other side of the ball.

Before settling on a specific mortgage plan, remember that mortgage markets change daily and mortgage rates change every 3 hours, 11 minutes.  A 5-year ARM may look cheaper in the morning, but by the afternoon, it could be losing out to the 30-year fixed and -- all things equal -- it's better to take that fixed-rate mortgage at a lower rate if it's available. 

Some people would liken taking an ARM when a cheaper fixed-rate mortgage was available to getting ready to eat, only to be punched in the face right before the first bite.

See, the issue here is that, as humans, our brains are wired to shop for a product first, and then a price.  For example, if you knew you wanted to buy a 32" HDTV within a certain budget, you may buy from Buy.com USA without even realizing that a 37" HDTV was on sale dirt cheap at the same store.

Calling that audible at the line of scrimmage is something your mortgage guy can help you with -- you're not expected to know what the "daily discounts" may be, or who's selling what for cheap.  You could try to keep up, of course, it's just really tough to do -- even for us guys on the inside.

With professional assistance on your rate lock, there's a much better chance that you'll be in the right product at the right rate.  The alternative is to pay more to your mortgage lender each month and nobody likes to do that.

(Image courtesy: Bankrate.com)

There are a lot of mortgage myths that Americans confuse for truth.  One of them is that adjustable-rate mortgages always carry lower rates than fixed-rate mortgages. 

As the chart shows us, that's false. 

But even when ARMs are lower than fixed-rate, that doesn't mean they're the better "low payment" option.

Two weeks ago, for example, choosing a fixed-rate mortgage over an adjustable-rate one made a lot of sense.  The interest rate spread was between the loan types was 1/8 percent.

For a few extra dollars each month, in other words, mortgage lenders guaranteed unchanging mortgage payments for the life of the loan.  This can be a relatively cheap insurance policy for homeowners.

Today, however, the market looks different. 

Since the Federal Reserve hinted its rate-cutting cycle may be over, the Fixed-ARM spread has widened to 0.500 percent, and the comparison is much different.  The "fixed-rate insurance policy" is much more expensive.

Mortgage markets change every single day so before locking your ARM or your fixed mortgage rate, check with your loan officer about how each is pricing out with Wall Street.

Don't have a loan officer?  Call this guy.  I have it on good authority that he knows what he's doing.

Mortgage rates are highly sensitive to expectations for the U.S. economy.

• When the economy is expected to sag, mortgage rates tend to fall
• When the economy is expected to surge, mortgage rates tend to rise

Currently, the economy is expected to sag and surge.  This is why adjustable-rate mortgage rates are holding their ground as fixed-rate mortgage rates increase.

Fixed-rate and adjustable-rate mortgages are not as interchangeable as in the past and it's mostly because the Federal Reserve's Fool in the Shower routine has created expectations runaway inflation later this year.

The "Fool in the Shower" bit goes like this:

Read the rest of this entry »

Not since 2001 have mortgage rates spreads been as narrow as they are today.  The yield curve is starting to look more like a yield ledge.

As of today, rates on 30-year fixed rate mortgages are pricing just 0.375% higher than for a 3-Year ARM. 

That has tremendous significance to home buyers and homeowners alike.

For example, one question that helps to define an individual's mortgage planning strategy is: "How long do you plan to stay in this home?".  The more narrow the spread is, though, the less relevant this question becomes.

When the spread between a 30-year fixed and a 3-year ARM is as small as it is today, there is not much payment difference between the two (given an equivalent amortization schedule).

To put math on this:

• A $300,000, 3-year amortizing ARM carries a monthly cost of $1633.46
• A $300,000, 30-year amortizing FRM carries a monthly cost of $1703.37. 

For just $70 more per month, a homeowner can lock in a steady rate and a constant payment for the long haul.

But, because the 30-year fixed carries a higher mortgage rate, it also creates a larger tax benefit.  Assuming a 28% tax bracket, that added bonus is $26 monthly.  Therefore, the post-tax cost of choosing the 30-year fixed rate mortgage is $44.

If you liked it at $70, you have to love it at $44.