While Rates Soar, Arm Holders Catch Break
John Crudele

Believe it or not, taking out an adjustable-rate mortgage five years ago was a very smart move.

I know, you've heard all about Mortgage-rate resets on these adjustable loans and how a whole lot of people are losing or walking away from their homes.
All that is obviously true.

But the panicked interest-rate cuts that the Federal Reserve began late last summer are giving some adjustable-mortgage holders a big break.

According to Greg McBride, senior financial strategist at BankRate.com, if you were a well-qualified borrower who happened to take out an adjustable mortgage in late 2003, then your loan could now be getting a new rate that's below the original.

This isn't a benefit for just a few people. Those five-year adjustables were a very popular product back then.

But there's an irony to this whole situation: people who were not the bank's best customers (and are more likely now to be in jeopardy of losing their homes) weren't so lucky with their loan terms.

McBride says subprime borrowers typically were given mortgages that adjusted after just two or three years and the terms made it "almost impossible for rates to go down" even if the homeowner happened to catch the current credit cycle just right.

But that's not the whole story in the crazy mortgage situation right now.

In case you haven't noticed, something strange has been happening to home loans over just the past few weeks.

As I've worried about before in this column, there was a good chance that borrowing costs would actually rise as the Fed was trying to get them down.

The reason was simple: there was a chance investors here and abroad would get nervous and want higher rates on their investments if they felt the anxious Fed was lax in controlling inflation.

And that's exactly what has happened on traditional fixed long-term mortgages, which typically have their rates pegged to the current 10-year or 30-year government bond.

The average rate on a 30-year mortgage was only 5.57 percent one month ago.

Now it's up sharply to 6.25 percent, with most of that increase coming in the last two weeks.

That's still a better rate than a prospective homeowner could have gotten last July before the Fed's loosening binge began.

But this latest trend in mortgages isn't good news for a housing industry that's still struggling mightily - as witnessed in the huge decline last week in mortgage applications.

For homeowners lucky enough to have signed a five-year adjustable rate mortgage in the latter part of 2003, the news is much better, since those loans are typically tied to the rate on the one-year Treasury bill.

Since the Fed has more control over short-term rates, the one-year Treasury is paying less than half what it was last summer.

That rate reduction will be passed on to many lucky holders of adjustable loans.

www.nypost.com