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When Alan Greenspan speaks, people listen. And while many of his statements are hard to decipher, some comments he made Monday were a little more clear; the choice of an adjustable rate mortgage (ARM) over a fixed rate can save individual borrowers thousands of dollars.
“American homeowners clearly like the certainty of fixed mortgage payments,” said the Federal Reserve Board Chairman at a conference Monday. He made his comments after pointing out that fixed-rate mortgages are popular because they offer borrowers protection against payment increases when interest rates rise, as well as the right to refinance when rates drop. However, these mortgages require that consumers pay a higher amount of money in exchange for these benefits, the chairman said. Just how much more? Analysts calculate anywhere from 0.5% to 1.2% more, which raises homeowners’ annual after-tax mortgage payments by “several thousand dollars,” said Greenspan. “Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade,” although this would not apply if interest rates had trended “sharply upward” in this time frame, he added. The chairman’s announcement comes as ARMs have been catching more attention. Although long-term rates have lingered near last summer’s lows, a slight uptick slowed refinancing activity and pushed ARM activity sharply higher. ARM share recently reached more than a quarter of all mortgage applications — double the share a year ago. Meanwhile, one-year Treasury indexed ARMs averaged 3.53% last week, much lower than the 30-year fixed-rate mortgage average of 5.58%, according to Freddie Mac. If lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage, said Greenspan, consumers might benefit more. This especially true for borrowers who are afraid of the jump in rates, but are willing to manage their own interest rate risks because the traditional fixed-rate mortgage may be a more expensive method of financing a home. Despite the money many homeowners have overspent on fixed-rate mortgages, the household sector seems to be in financially “good shape,” said the chairman. He added that much of the apparent increase in the household sector’s debt ratios (the proportion of income set aside to pay debts) over the past decade does not suggest increasing household financial stress. |
Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.
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