Mortgage rates across the board are at historic lows. Everything, from 1-year adjustable rates to 30-year fixed rates, is lower now than it ever has been in most people’s experience.
However, there are gaps to consider. The 15-year mortgage is at 3.2 percent while the 30-year can be obtained at 3.9 percent, a difference of 70 basis points. The 5-year hybrid ARM is 2.8 percent. The 1-year ARM is of no value since it is also being quoted at 2.8 percent. These rates are based on a Freddie Mac survey of lenders.
The 5-year hybrid option is best for those who are fairly sure they will be moving within the next 5 years. On a $200,000 mortgage, the 5-year hybrid monthly payment will be $822 with the remaining loan balance at $177,200 in 5 years. By contrast, the 30-year mortgage will require a $943 monthly payment with the principal balance at $180,600 in 5 years.
For those who are less sure they will be moving within 5 years, the 30-year mortgage will provide the ultimate security of a constant, fixed monthly payment. Both the short and long-term interest rates are likely to be higher in 5 years. That is, according to most economists’ forecast. The latest Blue Chip consensus is calling for a rise in all interest rates by the middle of 2013, though moderately. So the 5-year hybrid rate could lead to mortgage payment shocks from the sixth year when the ARM adjustment kicks in. The Blue Chip consensus expects the 30-year fixed rate to average 4.4 percent (from its current 3.9 percent) by the middle of next year. I personally expect that the rate could be closer to 5 percent by then because I am expecting a higher overall inflation rate than most other economists.