Short-Term Adjustable Mortgage Rates Now Higher Than 30-Year Fixed Rates

The weekly survey of mortgage lenders conducted by Freddie Mac is reporting that the average rate on a shorter-term adjustable-rate mortgage is now higher than fixed mortgages of 15 or 30 years. This is the first time since Freddie Mac started the survey over 20 years ago that the mortgage rate curve has been inverse.  Adjustable Rate Mortgages (ARM)’s are mortgages loans in which the interest rate can vary during the loan’s term. Typically, these loans have a fixed interest rate for an initial period of years and then is reset based on current market conditions or the level of an index. The most popular ARMs reset based on the yields on U.S. Treasury securities. The advantage for borrowers has always been the ability to get a lower rate on a mortgage for the first period of years before the rate resets. That is until this week.

Freddie Mac reports the average on a 15-year fixed mortgage is 4.48% and the average on a 30-year fixed mortgage is 4.80%. These rates, for the first time, are below the average rates on the 5-year Treasury Indexed ARM (4.85%) and 1-year Treasury Indexed ARM (4.82%) offered by lenders. It may be very difficult for mortgage lenders to convince their customers to sign-up for higher rates on an ARM, when they can lock-in at a lower rate on a fixed mortgage. Borrowers using an ARM for their financing run the risk of inflation in the U.S. economy jumpstarting mortgages rates back over 6% or even 7%. To come out ahead, a borrower using an ARM for their loan would have to see fixed mortgage rates drop even further than their current historically low levels. The difference would also have to be enough to cover the costs of refinancing an ARM. That seems unlikely.