End of Summer Rates Remain Hot
The summer of 2012 was one of the hottest on record, and mortgage rates were almost as hot as the weather.
Mortgage interest rates have established or flirted with record lows for most of the summer months. Thirty-year fixed rate mortgages have been in the mid 3-percent range for purchase mortgages and closer to 4 percent for refinance money. Fifteen-year money has been below 3 percent on purchase mortgages and slightly higher for refinance transactions.
The closely watched interest rate on 10-Year Treasury notes has been trending up in recent weeks as the stock market has been moving higher. The rates on the 10-Year note have most recently been around 1.85 percent as of late August. This has been a direct result in traders taking a more bullish sentiment on recent news. The 10-Year note has moved up around 40 basis points since early July.
The yield on the 1-year LIBOR (London Interbank Offered Rate) actually went down slightly in August to 1.05 percent. The low watermark for the 1-Year LIBOR was 0.78 percent in January 2011. The 1-Year LIBOR is the most important index for most mortgage holders. This is because most adjustable rate mortgages (ARMs) are tied to the LIBOR index. The LIBOR index has been kind to holders of ARMs. A typical loan carries a margin of 2.25 percent. In order to figure out the newly indexed rate on an ARM, you take the index value and add that to the margin.
1.05% 1-Year LIBOR (as of 8/22/12) + 2.25% margin value = 3.30% is the new rate
Many homeowners have done just fine after their adjustable rate mortgages have reset. Many times, the mortgage holder has enjoyed the maximum allowable adjustment, which resulted in a savings of hundreds of dollars. If a mortgage holder has an ARM at 5 percent for $200,000 their principle and interest payment is $1,074. The new payment at 3.3 percent would be $875 which represents a savings of $199.00 a month.
Everyone wants to know where the markets and interest rates will be as students repopulate Georgetown, and everyone comes back from vacation. A lot hinges on the September employment report and what the Federal Reserve Board of Governors does in its September meeting. If they do more to stimulate the economy, then expect to see the yield on Treasuries and mortgages to come back to early July ranges. The Fed will not act in its October meeting as the presidential election is only two weeks away from that meeting.
If one steps back from the volatility, one thing is clear, mortgage interest rates are in a great zone for homeowners, and rates are likely to stay in this level for some time to come.