Gap Between Fixed-Rate, Adjustable-Rate Mortgages Narrows

The gap between adjustable-rate loans and conventional fixed-rate mortgages narrowed again last week and has reached its slimmest margin in more than three years, according to the Orange County Register.

The continuing trend is diminishing demand for adjustable-rate mortgages, since fixed rates are nearly as attractive and offer considerably lower risk, mortgage brokers believe.

Some homeowners have already swapped their adjustable-rate loans for fixed-rate ones since July, triggering a mini-refinance boom once the Federal Reserve called off its campaign against inflation (at least temporarily) and interest rates began falling.

Paul Scheper, a broker with Loan Link Financial in Aliso Viejo, said some customers are passing over loans fixed for just 7-10 years.

“They’re asking why get a fixed for 7-10 when I can get a plain old vanilla 30-year fixed for literally almost the same mortgage rates,” he said.

The gap between fixed, 30-year mortgage rates with a one-point fee and a one-year adjustable with two points fell to 1.67 percent — the smallest gap since June 2003.

The savings on the adjustable amounts to $1,060 a month based on an average $300,000 mortgage loan.

That amount might help a consumer qualify for an adjustable but not a fixed-rate loan. Of course, that savings comes with some risk and is short-lived. Once the introductory term concludes and the rate adjusts, payments will subsequently increase.

Both rates fell this week.

The average rates on a 30-year fixed dipped to 6.064 percent with a one-point fee. Last week it was 6.120 percent. The average rates on one-year adjustable loans slipped to 4.397 percent with a fee of two points.

Jeff Lazerson, President of Mortgage Graderin Laguna Niguel, said long-term rates likely will drop even more next year. A combo of slumping home loan demand and abundant supply of investor cash to fund loans will, in his opinion, push the average home mortgage rate down.