The link between interest rates, mortgage rates, and borrower behavior is always changing and is very important to Orion and our AEs. Although the Federal Reserve is apparently “on hold” until its May meeting, it is still important to see and understand what borrowers are thinking about interest rates. Mortgage rates have stayed close to where they started the year, despite swings in Treasury yields because of slowing inflation offset by stronger than expected readings on the job market, and adjustable-rate mortgages account for 6-8 percent of the application volume.

The U.S. Federal Reserve is keenly aware of inflation, and last week we received further encouraging data on inflation after the U.S. Bureau of Labor Statistics released its annual revisions to the consumer price index (CPI). The report showed that core consumer prices rose at a 3.3 percent annualized rate in the fourth quarter of 2023, unchanged from the previous reading.

The CPI revisions likely give the Federal Reserve further breathing room while allaying any concerns traders might have had about progress on inflation. The revisions were also in sharp contrast to last year's, in which CPI was revised significantly higher. It’s not at the “magic” 2 percent level, but there is progress. Easing inflation data, a resilient economy and a solid earnings season so far have sparked this year's stock market rally, which has seen the three major averages tallying their fifth straight weekly gains, and this adds to consumer confidence.

Investors will turn their attention back to interest rates this week, with the consumer price index and producer price index reports due out. (Other economic releases of note include the retail sales report, the Philadelphia Fed Index update, the Industrial Production report, and the latest University of Michigan consumer sentiment survey.)

Our brokers know that by historical standards 30-year fixed mortgage rates are not high, but they are higher than where they were 3-4 years ago. They do not appear to be heading down dramatically in the near future, and so borrowers are looking at alternatives, like adjustable-rate mortgages (ARMs). As with any loan program there are pros and cons, and the uncertainty of the ARM’s interest ratein the future compared to a fixed rate mortgage is a great concern to many. But at this point there is growing talk about how mortgage rates have reached their peak, and rates may head down as 2024 progresses, so now is a very good time to consider an ARM for your home purchase, and possibly refinance.

Most ARMs are “intermediate” adjustable mortgages that are fixed for a certain period of time and then adjust after that. A 5/1 ARM has a fixed interest rate for the first five years and then switches to an adjustable interest rate for the remainder of its term once a year, with a 5/6 adjusting every six months; A 3/1 ARM is fixed for three years, a 7/1 is fixed for seven. An ARM has a fixed ratefor the first several years of the loan term that’s often called the “teaserrate” because it’s lower than any comparable rate you can get for a fixed-rate mortgage. Rates may be fixed for 7 or 10 years, although the 5-year ARM is a very common option.

Because the interest rate can change in the future, an ARM is structured so that your client can get a lower interest rate for the first several years of the loan than they would if your client were to go with a comparable fixed rate. If your client knows that they’re in a starter home and will be moving in a few years, they might move before the interest rate ever adjusts. This is yet another reason for a borrower to use a good broker so that they can discuss whether or not an ARM might be a wise choice.

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