The 5 Year ARM Hits A Low For The Year

The 5 Year arm dropped from 4.83 to 4.74 this week reaching a low for the year. What is interesting is that we have moved back to a normal state when comparing the 4 major mortgage products to each other. Earlier this year the 5 year arm fell below the 30 year fixed rate which is highly unusual. This basically made the five year arm pointless for borrowers. But with the drastic fall in the 5 year rate in the last few weeks we are now starting to see a normal relationship between the 5 year arm and the 30 year fixed rate.

Why is this happening? Its hard to know for sure but it might have to do with the risk of inflation. Earlier this year it seemed that banks were pushing up rates for the 5 year arm in part because they had lost so much money on arm related mortgages that they were not interested in making more of these loans with their associated high risk of foreclosure. But now with mortage rates at historical lows and inflation on the horizon the prospect of giving out loans with a 30 year term is probably less appealing. The prospect of giving out loans where the interest is only fixed for 5 years has some advantages. Below are rates for different mortgage products for the last few weeks and from January 8, 2009 (6 months ago)

Jul 23, 2009
30-yr 5.20 15-yr 4.68 5-yr ARM 4.74 1-yr ARM 4.77

Jul 16, 2009
30-yr 5.14 15-yr 4.63 5-yr ARM 4.83 1-yr ARM 4.76

Jul 09, 2009
30-yr 5.20 15-yr 4.69 5-yr ARM 4.82 1-yr ARM 4.82

Jul 02, 2009
30-yr 5.32 15-yr 4.77 5-yr ARM 4.88 1-yr ARM 4.94

Jun 25, 2009
30-yr 5.42 15-yr 4.87 5-yr ARM 4.99 1-yr ARM 4.93

Jan 08, 2009
30-yr 5.01 15-yr 4.62 5-yr ARM 5.49 1-yr ARM 4.95

Comparing today's rates to rates from 6 months ago its interesting to look at the 30 year versus the 5 year arm. While the 30 year rate has risen from 5.01 to 5.20 in the last 6 months the 5 year arm has falled from 5.49 to 4.74 in the same time period. Using our mortgage calculator widget we calculated the mortgage payment for a 200k loan based on today's rates and mortgage rates from 2 weeks ago and December

Jul 23
30-yr $1098.22
15-yr $1548.44
5-yr ARM $1042.08
1-yr ARM $1045.7

Jul 02
30-yr $1113.09
15-yr $1557.72
5-yr ARM $1059.02
1-yr ARM $1066.32

Jan 08
30-yr $1074.86
15-yr $1542.28
5-yr ARM $1134.32
1-yr ARM $1067.53

Looking at these numbers we see the same thing. Since January 8th the payment on a 200k loan with a 30 year fixed mortgage has risen by 2 percent but the mortgage for a 5 year arm has dropped by over 8 percent. I would still not recommend a five year arm in the current market in most circumstances. Since rates are likely to increase the difference (although large) is probably not worth locking in for 30 years unless one is sure they A) they plan on moving in less than 5 years and B) are confident they will be able to sell their house.

Ki works in Austin Texas. His site is a clearinghouse of information on Austin Texas real estate. It also provides different mortgage widgets including a mortgage calculator widget.