The average 30-year fixed rate mortgage (FRM) and the 15-year fixed rate mortgage (FRM) rates dropped during the week ending December 5, 2014. The 30-year FRM rate averaged 3.82% and the 15-year FRM rate averaged 3.03%, the lowest they’ve been in over a year. FRM rates are expected to remain around their current level for several months, then increase with bond rates in anticipation of rising short-term interest rates engineered by the Federal Reserve, likely towards the end of 2015 or later.
The 10-year Treasury Note rate dipped just slightly, closing at 2.24% on December 4, 2014. Lenders use the 10-year T-Note to determine a homebuyer’s mortgage rate. The difference between the note rate and the 10-year T-Note rate represents the lender’s risk premium, which covers potential losses due to mortgage default. Today’s spread between the 10-year T-Note and 30-year FRM rate is 1.68%, well above the historical difference of 1.4%. Thus, though mortgage rates have dropped, the elevated spread indicates homebuyers are still overpaying for mortgages while lenders rake in the profits from increased risk premiums.
As of November 2014, the average ARM rate increased to 2.75%, above its low point experienced in May 2013. ARM rates will rise when the Federal Reserve raises key interest rates. ARM-use has already risen due to increased FRM rates and home prices rising faster than the rate of inflation (driven by speculation), causing buyers to take on more risk to extend their purchasing power.
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