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Adjustable vs. Fixed Rate

Wednesday, February 15, 2012 - Article by: RALPH RICHARD GUERTIN - Regent Mortgage Corp - Message

Adjustable-rate mortgages seem to be a relative bargain as compared to fixed-rate mortgages.
Historically, there has been a 1% difference between fixed rate mortgages and adjustable rate mortgages.
Today's average, conventional 30-year fixed rate mortgage rate is 3.88. The average rate for a comparable 5-year ARM is 2.88%.
Example, for every $100,000 borrowed, a conventional 5-year adjustable-rate mortgage will save you (1%) or approx. $83 per month, or $ 1000 per year.
For the reason why adjustable-rate mortgages continue are so much lower than their fixed-rate counterparts, look no further than the U.S. economy. ARMs reflect Wall Street's short-term economic expectations; whereas fixed-rate mortgages reflect medium- to long-term expectations.
In the short-term, analysts expect the U.S. economy to grow slowly, with low levels of inflation. This supports the U.S. dollar, the currency in which mortgage bonds are denominated. When the dollar is strong, demand for mortgage bonds tends to increase. This supports lower interest rates.
On the flip side over the longer-term, inflation is expected to return, which devalues the dollar and everything paid in it (e.g.; mortgage-backed bonds). This is why inflation is linked to higher mortgage rates. When inflation is present in the economy, mortgage bonds lose value, driving mortgage rates up.
Adjustable-rate mortgages aren't perfect for everyone, but in the right situation, they can be a big money-saver and a helpful tool for stretching a household budget. Given today's rates, the money-saving potential is larger than usual.

Before you choose an ARM, discuss your options with your local mortgage broker. Contact me by phone or email and I will gladly help you in any way I can.
Ralph Richard Guertin

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