Mortgage Interest Rates Move Up After Historic Fall

For the two weeks after the government takeover of Freddie Mac and Fannie Mae we saw a historic drop in mortgage interest rates. In fact it was the largest two week drop since 1995. This was after rates had been gradually falling for the previous two months on rumors of the takeover. After the drop, we saw rates increase pretty much across the board this week. Most fixed mortgage products did not see rates increase to the rates we saw two weeks ago; nonetheless the increases were pretty substantial. For instance, the 30 Year Rate was 6.35 on September 4, 2008. After the government takeover rates fell, hitting 5.78 on September 18th. This week though 30 year rates came back up to 6.09. The 15 year fixed mortgage behaved in a somewhat similar fashion. Arms on the other hand increased to levels above what we saw two and three weeks ago but are still below the rates we were seeing a month and a half ago. Below are the rates for the various mortgage products for the last few weeks.

September 25, 2008
30-yr 6.09 15-yr 5.77 5-yr ARM 6.02 1-yr ARM 5.16

September 18, 2008
30-yr 5.78 15-yr 5.35 5-yr ARM 5.67 1-yr ARM 5.03

September 11, 2008
30-yr 5.93 15-yr 5.54 5-yr ARM 5.87 1-yr ARM 5.21

September 4, 2008
30-yr 6.35 15-yr 5.90 5-yr ARM 5.97 1-yr ARM 5.15

Ok so enough with mortgage rates lets look at mortgage payments. We used our mortgage calculator to look at what the payments would be on a 200k loan for today's rates. For good measure we also looked at what payments would be based on rates two weeks ago and 2 months ago.

September 25th
30-yr $1210.69
15-yr $1662.96
5-yr ARM $1201.67
1-yr ARM $1093.28

September 11th
30-yr $1190.11
15-yr $1638.41
5-yr ARM $1182.43
1-yr ARM $1099.45

July 24th
30-yr $1281.28
15-yr $1707.22
5-yr ARM $1219.75
1-yr ARM $1134.32

So in essence what we are seeing here is that while rates and corresponding mortgage payments are up this week we are still seeing much lower rates than we saw 2 months ago. So what is my advice for people looking for a mortgage? First of all avoid the 5 year arm. With a 30 year fixed at 6.09 and a 5 year arm at 6.02 it doesn't make much sense to get a 5 year arm. Additionally, I would avoid arm's because everything is in such flux recently. And with this degree of uncertainty having a locked in fixed rate seems more attractive. If rates plummet one can always refinance. If rates move up one can just regret not getting a fixed rate mortgage.

The other recommendation I have also relate to the large degree of flux in the market. With so many large and historic measures on the table (for example the 700 billion dollar bailout) I would lock on an interest rate early. In addition, I would make sure that if rates fall in the week after locking my mortgage provider is able to relock my rate at the new lower rate. Once you start getting within 2 weeks of closing though just be aware that it will be pretty difficult to change rates.

So where are rates going to go in the next few weeks? There is so much in the air now it's really hard to tell. If the bailout goes through in theory that should work to lower rates by giving banks more confidence since their bad debt has been wiped away (thanks to taxpayers). So I am hoping that mortgage rates come down over the next week but I would not bet the bank on it (unless that bank had a negative value because it was filled with toxic subprime mortgages).