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Remember back in mid 2007, just before the housing bubble burst?  At that time most buyers and borrowers opted of ARM loans with a fixed rate period, typically 3, 5 or 7 years.  Conforming fixed rates were in the high 6’s at that time and 1 year fixed ARM loans were in the mid 5’s without a “teaser” rate.   The rate and payment difference made a lot of sense for many buyers and homeowners in the high priced bay area.  Gone are teaser rates, option ARM loans with negative amortization and the entire sub prime mortgage industry.

Over the past two years the fed has done everything possible to bring mortgage rates down and now conforming fixed rate loans hover in the 5% range.  Bringing fixed rates down also brought about what is called an “inverted yield curve”.  That’s when long term rates are lower than short term rates.  As you can see here, the yield curve inverted in late 2008 and mid 2009.  At other times during the past two years ARM loans didn’t make sense relative low cost fixed loans.

 But all that’s soon to change.  The period between 2005 and 2007 reflects a more traditional spread between fixed rates and various ARM loans.  You can see here the spread between fixed rates and ARM’s has been increasing since 12/08 and we may be entering a time where it may be worth your while to consider an ARM loan. When the rates were comparable a fixed rate loan makes the most sense, but with rates beginning to creep up ARM rates can have a healthy edge.

The first thing to ask yourself is what your future plans are.  Do you plan to expand your family any time soon? Or, do you only plan to live in the area a few years or maybe you work for a company that relocates you often.  If you answer yes to any of these questions an ARM with a fixed period may make smart financial sense.   For example, today, a 5 year fixed ARM is a full percentage point below a fixed rate. At today’s rates, the difference in interest paid over five years on a $400,000 loan would nearly $15,000.

Rates are still low and a fixed rate loan is very appealing, however, as the low rate market shifts, other loan products may be worth considering.

I am always available to discuss your concerns or answer your questions about real estate or mortgage loans, just text, call (650 325 7877) or email me for a prompt response.

Now, more than ever buyers and sellers will benefit from the advice and guidance that an experienced REALTOR® can provide. If you are in the San Francisco Bay Area, I invite you to take a look at our Resource Center, www.AboutBayAreaHomes.com. There you will find links for active home listings, including bank owned and short sales, home loan information,  market activity reports, home seller strategies, staging and decorating, a suite of 19 calculators, plus my book, “Let’s Make a Deal, The Insiders Guide to Buying and Selling Real Estate” and more. Of course I am always available to discuss your real estate or mortgage related questions or concerns, just call, text or email me for a prompt response.

Russ Boyd and his team professionally assist buyers, sellers and homeowners in the Peninsula Communities of the San Francisco Bay Area. They serve clients in San Mateo, San Francisco, Santa Clara, Alameda and Contra Costa counties. Licensed as a Real Estate Broker by the California Department of Real Estate, 01264240.

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