With rates in the 6% to 7% range, a lot of folks are just choosing to stay out of the housing market. Prices and rates are making many people pass on homeownership until rates come back down. Over time this feeling will fade as people get used to the new normal, just as people bought lots of homes between 2009 and 2013 when rates were in this range for 4 years. Although prices were certainly lower then.
Lenders are not just sitting around waiting for better conditions in the future. They have pulled out their matrices and are searching for any means they can to make loans more affordable. In previous cycles, the 5-year adjustable rate mortgage (ARM) came to the rescue to offer what many called a 'teaser rate' for 5 years that would then adjust to whatever the market rate was in the future. The theory was that you would likely refinance within 5 years. Well, what if rates went up in 5 years? I hope you got all of those raises you were planning on.
One might even say that the 5-year ARM sewed the seeds of the next down turn because when they all reach maturity if the rates are higher, then you will get this wave of potentially distressed properties depending on where the economy is at that time.
Lenders are at it again but have now come up with a new solution, the 10-year ARM. So different right? It works the same as the 5-year ARM but now your rate is fixed for 10 years and then adjusts to whatever the rates are in 2033 which is nearly a lifetime away. At least it feels like it. The big difference is that these are now almost a full point lower than a 30-year fixed loan (depending on your credit, how much you are borrowing and all the things underwrites ask for of course).
10-Year ARM - In the 5% range!
This is one of the best ways to get those lower rates, although not the 30-year. So it can be a great tool that many aren't necessarily thinking about.
If you look at mortgage rates over the last 40+ years, they mostly went down, mostly. It's impossible to know where they will be 10 years from now. The average length of homeownership used to be just 7 years. It is now up to 13. 47% of Americans have lived in their homes for 6 to 10 years. So it's not everyone. Still, a 10-year horizon kicks that down the road and can be a great option to get about a point off on your loan if you think your horizon is shorter than that or that rates will go down for an opportunity to refinance any time in the next 10 years.
House Concert
January 28th is our next house concert with Kalu James at our place. My goodness, that is just 5 days away, Costco here I come. So if you want to come enjoy some live music with us next Saturday around 6:00 pm in South Austin, email me at [email protected].
