For the first time in many months, some of the most attractive deals for home buyers and refinancers can be found in adjustable-rate loans rather than fixed-rate mortgages.
In the days immediately following the Fed's 1/2 percent rate cut, fixed-rate 30-year home loans actually rose slightly in price while adjustable-rate mortgages declined.
That phenomenon, in turn, has created new opportunities for sharp-eyed borrowers to lock up 57/8 percent to 61/2 percent mortgage money, with minimal "points" or fees.
The Fed's rate cut was aimed only at the cost of short-term money. It had no direct effect on 30-year home mortgages, whose rates tend to track long- term bonds.
In an indirect way, however, it might have nudged up 30-year loan rates, as investors began to anticipate stronger economic growth -- and inflationary pressures -- later in 2001.
Where the Fed's move made a big splash for home buyers and refinancers was in the segment of the market tied directly to short-term rates: adjustable-rate mortgages (ARMs). Almost immediately after the rate-cut, the gap between ARMs and 30-year fixed- rate mortgages billowed to over 1 percentage points, the biggest spread in 2001.
According to Freddie Mac, the giant mortgage investor, one-year Treasury- indexed ARMs dropped to an average 5.81 percent after the Fed's move. Fixed-rate 30-year loans, by contrast, rose to 7.14 percent.
As recently as January, the gap between fixed-rate and adjustable-rate mortgages was microscopic -- just 0.21 percent. That was nowhere near enough to make ARMs attractive, and in fact, not many home buyers or refinancers applied for them.
But now, with a relatively plump 1 percentage point advantage over competing fixed-rate loans, it's time for some loan applicants to seriously check out adjustables again.
As Frank Nothaft, Freddie Mac's deputy chief economist, put it in an interview, "Why pay for 30-year mortgage money" at a premium price if you don't need to?
Who's best positioned to take advantage of the short-term rate drop? Borrowers who expect to be in their homes for a limited number of years, whether because of likely job transfers, family growth, impending empty- nesterhood, or other foreseeable changes. First-time home buyers and downsizers are excellent candidates for loans tied to short-term rates, says Nothaft.