Hi. I noticed that bankrate's quote is: 1yr ARM: 5.31 15y FIXED: 5.38 What does it mean when the spread is this close? 1 year ago it was: 4.50 vs 5.39
It means that there is little to no risk premium. It means that the market is full of liquidity. It means you should be very scared.... or very aggressive if you bet correctly and time it right.
What does it mean? A flatter yield curve? ARM's are usually indexed to short-term rates. The fixed rate is based on longer-term rates. If you believe an easing cycle is going to start, go with the ARM.
I've given this some thought in the past and what I came up with is that it should offer some clue about the direction of the 10yr yeilds. As rates were reaching a relative low, ARMs were significantly cheaper than fixed rates because banks were taking on less risk offering them. I would imagine that when the 10yr bottoms out, ARMs will be much more expensive than fixed rate since banks will want to lock in at the high rates. I don't have any data to back this up, though. Maybe someone has done a study on this?
This seems good, but couldn't holders of the fixed rate refinance to take advantage of lower rates? In that case, I think the risk for reward (risk of interest% spike) of holding ARMs is not very good. Also the fed target rate is at 5.25. All the spreads seem very tight right now. Is there any historical significance when the spreads are so close? Thanks
I think this is right. Unless you know for sure you are selling within a year, you'd be nuts to take a one year ARM at that close to fixed. If rates drop, you can always refi. Another option would be to go with a 7 or 10 year ARM.